Preamble

The House met at half-past Two o'clock

PRAYERS

[Mr. SPEAKER in the Chair]

PRIVATE BUSINESS

MORPETH COMMON BILL

OLD LONDON ROAD, HYTHE, BURIAL GROUND BILL

Read the Third time and passed.

ORKNEY COUNTY COUNCIL BILL

Queen's Consent, on behalf of the Crown, signified.

Read the Third time and passed.

SPANISH AND PORTUGUESE JEWS' (GOLDERS GREEN) BURIAL GROUND BILL

Read the Third time and passed.

BARCLAYS BANK INTERNATIONAL BILL [Lords]

Read the Third time and passed, without amendment.

LONDON TRANSPORT BILL

Queen's Consent, on behalf of the Crown, signified.

Read the Third time and passed.

UNITED KINGDOM TEMPERANCE AND GENERAL PROVIDENT INSTITUTION BILL [Lords]

Read the Third time and passed, without amendment.

Oral Answers to Questions — DEFENCE

Harrier Aircraft

Mr. Michael McNair-Wilson: asked the Secretary of State for Defence what decision he has made about ordering the maritime version of the Hawker Harrier aircraft for the Royal Navy.

The Under-Secretary of State for Defence for the Royal Navy (Mr. Frank Judd):: We are determined that a decision should be taken as soon as possible within the context of the defence review. In the meantime, design work continues to be supported.

Mr. McNair-Wilson: In view of the complementary nature of this aircraft to the through-deck cruiser, does not the doubt hanging over the maritime Harrier also cast doubts on the future of the cruiser?

Mr. Judd: The plans for the cruiser are not dependent on the outcome of our V/STOL studies. The design of the ship incorporates the option of operating V/STOL aircraft, but her main capability will be the deployment of Sea King antisubmarine helicopters, together with the command and control of naval and maritime air forces and the contribution to area air defence provided by her Sea Dart system.

Rear-Admiral Morgan-Giles: Has the Minister had a chance to discuss this matter with his experts, and has it been made clear to him that without this aircraft the Royal Navy will be completely unable to fulfil its traditional function of protecting our trade routes? Will he try to do a better job on it than the previous Government did?

Mr. Judd: The hon. and gallant Gentleman will be pleased to know that we are determined to do a better job on this and all aspects of defence than did the previous Government.

Naval Welfare

Mr. Buck: asked the Secretary of State for Defence what is his policy towards the report of the Naval Welfare


Committee under the chairmanship of Lord Seebohm, and indicate what progress has been made towards its implementation.

Mr. Judd: We accept in principle the majority of the recommendations made in this most valuable report, and with the assistance of the existing staff we are pressing ahead with implementation as quickly as we can. In particular, arrangements to develop a professionally trained element within the Navy's social service are well under way.

Mr. Buck: I am grateful for that answer, but what progress is being made in recruiting staff for the new naval social service department? Who is to head it? Will it be someone recruited from outside or from within Government Departments?

Mr. Judd: I should like to pay tribute to the hon. and learned Gentleman's deep concern for this aspect of naval policy, which is well known. The head of the Naval Social Services will be at a senior professional level, at the appropriate salary scale. We hope to make the appointment in the not-too-distant future. We expect the top post and one or two other posts at the senior level to be filled by social work administrators from other Government Departments. Other posts will be open to qualified social workers currently employed by local authorities or other social service agencies.

Mr. Viggers: A major problem revealed in the Seebohm Report is housing in all its aspects. Can the Minister give us any information about increasing the coordination between local authorities and Service Departments?

Mr. Judd: I recognise that there is a serious problem here, and I am taking steps to make sure that there is the fullest possible consultation not only between my Department and local authorities but between all relevant Government Departments at national level.

Germany and Asia (Costs)

Mr. Ronald Atkins: asked the Secretary of State for Defence if he can now make a statement on his plans relating to the cost of keeping British forces in Germany and Asia.

The Secretary of State for Defence (Mr. Roy Mason): Our commitments in Germany, the Far East and elsewhere are being examined in the defence review. The examination will take into account all relevant factors, including cost.

Mr. Atkins: Does my right hon. Friend agree that it is easier to reduce the cost of the main item—namely, manpower— than the cost of equipment, and that if he were to do this it would be in accord with Field Marshal Montgomery's view that larger ill-equipped forces are less effective than small well-equipped forces? Does he agree that the Armed Forces abroad were responsible last year for a deficit of£423 million on the balance of payments, of which£300 million was incurred in Germany?

Mr. Mason: I cannot follow the diktat of Lord Montgomery. The series of cuts in one year introduced by the Conservaitive administration meant that projects had to be cut. In our examination we shall look at commitments. We hope in due course to be able to cut back commitments in an orderly run-down—not too far—without cutting into our NATO commitments and in that way lessen the effect on industry.

Mr. Ian Gilmour: The right hon. Gentleman said that the Conservative Government cut projects. Will he name them?

Mr. Mason: Within a few weeks' time, after the whole assessment has been made, I shall be obliged to name them, and they will be the result of the right hon. Gentleman's cuts.

Mr. Frank Allaun: Will the Secretary of State halt the lavish and expensive recruiting campaign so as to avoid having to make men redundant later?

Mr. Mason: No, I am sorry to say that I cannot do that. Our recruiting figures are down on last year. It is necessary to maintain recruiting, and present circumstances require the right level of recruiting, as my hon. Friend knows.

Northern Ireland

Mr. Marten: asked the Secretary of State for Defence whether he will strengthen military control of the frontier between Northern Ireland and Eire.

Mr. Mason: The deployment of the Armed Forces within Northern Ireland is a matter for the General Officer Commanding. In deciding how to allocate the forces under his command he naturally takes into account all the operational factors involved including those outlined by my hon. Friend the Minister of State, Northern Ireland Office, last Thursday.— [Vol. 873, c. 1435-36.]

Mr. Marten: Does not the Secretary of State agree that anyone can cross the border by keeping off the roads? The longer this situation continues, the more difficult it becomes for our forces to cope with the IRA. Is there not scope for the British Government and the Southern Irish Government jointly trying to exercise more control over frontier-crossing once the situation in Belfast has been restored?

Mr. Mason: I am obliged to the hon. Gentleman for the way in which he approached that supplementary question. As he knows, there are about 300 miles of border and 280 crossings. We have border patrols, in which the Ulster Defence Regiment plays a prominent part. To cover areas where there are not any crossings we have helicopter patrols as well. Certainly we want more cooperation from the South, and in recent times that has been forthcoming.

Mr. Dalyell: Is the Secretary of State saying that it is an impossible job?

Mr. Mason: No, not impossible, but obviously difficult.

Mr. Wm. Ross: Does the right hon.Gentleman agree that spiking the roads is of no use because the IRA can operate a shuttle service?

Mr. Mason: We recognise the difficulties. To try to help the British forces in the North, we have been trying to seal off some of the roads. It would be impossible to have a Berlin-type wall along the frontier.

Mr. Molloy: Is my right hon. Friend prepared to consider consultations between his opposite number in Eire and police forces on both sides of the border, which might make a useful contribution to reducing terrorist activities?

Mr. Mason: I am obliged to my hon. Friend. If the authorities in Southern

Ireland were prepared to talk along those lines, we would certainly be willing to comply.

Mr. Gow: asked the Secretary of State for Defence what were the total strengths of the Armed Forces serving in Ulster on 1st Januray 1974 and on the latest available date.

Mr. Mason: The strength of the Regular Armed Forces engaged on security duties in Northern Ireland on 1st January 1974 was approximately 15,500. Recent reinforcements have temporarily brought this figure up to around 16,000. The strength of the UDR—including women members—on 1st January and 15th May was 7,927 and 7,754 respectively.

Mr. Gow: Is the Secretary of State able to confirm that the level of British troops in Ulster at the moment is not below the level for which the Commander-in-Chief in Ulster has asked? Secondly, when deciding on the future level of British troops in Ulster will he bear in mind that the overwhelming majority of people living there want the strength of the British troops to be maintained and that any reduction in their number would give comfort only to the extremists on both sides?

Mr. Mason: On the first point I assure the hon. Gentleman that Her Majesty's Government have responded to the request by the General Officer Commanding on the spot by granting him the troop additions that he requires. Secondly, I agree that while we have the present amount of terrorism and violence in Northern Ireland the troops must be maintained at this level and that until we build up the Royal Ulster Constabulary and the Ulster Defence Regiment no troops can be withdrawn.

Mr. George Lawson: Despite the sniping from this side of the House, will my right hon. Friend bear in mind that the great majority of people who appreciate the nature of the difficulties in Northern Ireland wish us to continue to defend law and order in the Province?

Mr. Mason: I am obliged to my hon. Friend for his support. I think that most hon. Members will welcome what he said.

Mr. Scott-Hopkins: Is there any chance that the tours of duty by Her Majesty's Forces in Northern Ireland could be cut shorter than they are at present? Is there any limit on the tours of duty that officers and men are asked to undertake?

Mr. Mason: I am sorry to inform the hon. Gentleman that there is no limit on the tours that they are asked to undertake. It is a worrying feature that they have to go back so often. As the hon. Gentleman will have noticed recently, the Devon and Dorset Regiment has been worried because it has to go back for the third time covering a Christmas period. While the terrorism and violence continues in Northern Ireland it will not be possible to lower the levels of troops there and consequently lengthen the period between their tours of duty.

Mr. Dalyell: Is my right hon. Friend aware that it is a question not of sniping but of facing the reality that 16,000 English and Scottish soldiers will not help solve the historic problem of Ireland?

Mr. Mason: The House has heard my hon. Friend's views. He has expanded on them before. I must reiterate that while the violence continues the force levels must remain as they are. If the situation worsens they will have to be increased.

Naval Establishments and Dockyards

. Mr. Evelyn King: asked the Secretary of State for Defence what defence cuts he has in mind; how far they are liable to affect naval establishments and dockyards; and if he will make a statement.

Mr. Judd: I have nothing to add to what my right hon. and hon. Friends and I said in the defence debate on 13th May.

Mr. King: Is the hon. Gentleman aware that it is becoming increasingly difficult in the Weymouth and Portland area to get industrial development certificates, because these decisions are taken in the context of defence activity? Will he give us an absolute assurance that defence activity will not also be cut in the Portland area?

Mr. Judd: It is too early to say what measures might have to be considered.

We are holding a systematic review and not indulging in arbitrary cuts. Naturally we appreciate that there is some anxiety among civilian defence workers. The Government have made plain their commitment to the interests of Service men and civilians alike and their determination to ensure that the valuable human and capital resources which may be released continue to be used in the best possible economic and industrial interests of the nation.

Mr. Viggers: The hon. Gentleman will be fully aware of the concern felt in the Portsmouth area about the possible future of Portsmouth Dockyard. First we want a decision, but, as a secondary and subsidiary point, if thoughts are being turned in the direction of civilian employment in the dockyards, will Portsmouth Dockyard have advantages similar to those in areas in the north of England in the construction of North Sea oil rigs and other activities?

Mr. Judd: Naturally, as the responsible Minister, I am concerned about the future of all four dockyards in this country.

Mr. Younger: Will the Minister give an assurance that if civilian work of this type is put to the dockyards it will not be done at the expense of civilians in other parts of the country? No one would be much better off if that happened.

Mr. Judd: Naturally, any steps taken in that direction will be taken in the fullest possible consultation with all other Government Departments.

Miss Fookes: asked the Secretary of State for Defence if he will clarify the future role of the naval dockyards in his review of defence expenditure.

Mr. Judd: The naval dockyards will of course continue to fulfil their role of supporting the Fleet.

Miss Fookes: One wants to know how large the Fleet is to be.

Mr. Judd: As a result of this review we are determined to have an effective Navy continuing to play its full and dynamic part within the alliance.

Mr. Hooley: Will my hon. Friend ask the Secretary of State to have consultations in advance with the Secretary of


State for Industry in the event of our needing some redeployment from naval to civilian use of these important facilities?

Mr. Judd: Consultations are already taking place between relevant Departments, and my hon. Friend's suggestions are very much in mind.

Dockyards (Civilian Employees)

Mr. Trotter: asked the Secretary of State for Defence how many civilians are employed in each of the following Royal Navy dockyards: Chatham, Devonport, Portsmouth and Rosyth.

Mr. Judd: Rounded to the nearest hundred the numbers are as follows: Portsmouth 8,900, Devonport 12,000, Chathham 6,500, and Rosyth 6,000.

Mr. Trotter: Does the Minister deny that a reduction in the strength of the Royal Navy would require the closure of one of those yards and that a large-scale reduction in the strength of the Royal Navy is inevitable if the commitments of his party in opposition are carried out?

Mr. Judd: As I said in answer to a previous supplementary question, should there be any spare capacity as a result of the defence review the Government are concerned to see the human and capital resources used in some other direction in the best possible interests of the nation.

Mr. Dalyell: Representing some of the 6,000 who work at Rosyth, I should be willing to see that work force run down so long as civilian work could be provided for North Sea oil rigs and development. It would be perfectly sensible to turn Rosyth naval dockyard into a base for North Sea oil.

Mr. Judd: My hon. Friend will recognise that it is far too early to make any predictions about changes in naval demands on the dockyards. Should such changes occur, we are determined to make sure that the rich resources of human and capital investment in those yards are fully utilised in the interests of the nation.

Mr. Ian Gilmour: The Secretary of State for Defence was honest enough in his speech to admit that cuts in defence equipment would lead to unemployment. Surely exactly the same applies to the

Royal dockyards? Would it not be more honest for the hon. Gentleman to admit it?

Mr. Judd: The right hon. Gentleman has played this theme for a long time, not least during the recent General Election. We recognise from first-hand experience and surveys that there are rich resources of capital equipment and human ability in the dockyards which we know can make an important contribution to the economic and industrial well-being of Britain.

Mr. William Hamilton: Is my hon. Friend aware that we want a firm assurance that both the civilian and the military personnel at Rosyth will be maintained at their present strength, if not increased? Will he give an assurance that full consideration will be given to the suggestion of my hon. Friend the Member for West Lothian (Mr. Dalyell) so that we may have a contribution to our essential NATO defences and civilian work on North Sea oil?

Mr. Judd: My hon. Friend will recognise that the dockyards at present are more than fully occupied in meeting Service requirements. If at any stage they are able to take on additional work in the interests, for example, of North Sea oil development, I shall be only too glad to see them moving in that direction.

Expenditure

Mr. Frank Allaun: asked the Secretary of State for Defence if he will state the proportion of the gross national product devoted to arms in the United Kingdom and the average for other European NATO countries on the latest available figures; what the annual saving would be in cash terms if Great Britain's share were cut to that average; and if he will make it his policy to make such a reduction.

Mr. Mason: For the United Kingdom, some 5-1 per cent, of the defence budget on national definition in 1974-5 and some 6 per cent, on NATO definition for 1973, the latest year for which NATO figures are available. For other European NATO countries on NATO definition, the average in 1973 was about 4 per cent. National and NATO definitions do not necessarily coincide. The saving on NATO definition last year would have been about


one-third of the defence budget on my hon. Friend's assumption. Percentage GNP is not the sole criterion, and I do not propose to be committed to a specific total for savings until the review is completed.

Mr. Allaun: Would not one-third of our defence budget be£1,200 million a year and, therefore, is not the request of the Labour Party Conference for a saving of£1,000 million a year a reasonable one? Has the Minister noted today that the Dutch Ministry of Defence is proposing a cut in arms spending to 3 per cent? Why cannot we do the same?

Mr. Mason: The NATO definition is a common standard, and in some cases it omits expenditure which some countries think should be included and in other cases it includes expenditure which the countries concerned think should be omitted. The difference in 1973 on our reckoning is that the NATO definition adds at least£120 million to the national definition.

Mr. Kershaw: Is not the best guide to our defence expenditure not what our friends spend but what our enemies spend on defence?

Mr. Mason: If the hon. Gentleman had attended last week's defence debate he would have heard what I said on that occasion, which was quite clear.

Mr. Wellbeloved: Will my right hon. Friend agree that, given the determination to have a defence system for the United Kingdom, the experience of Sweden shows that in terms of defensive contribution collective defence within NATO is a far cheaper defence contribution than neutrality? When we examine the Swedish figures and take into account the fact that Sweden has been at peace for 142 years—and incidentally has had a Socialist Government for 42 of those years—must we not conclude that defence expenditure in Sweden in both GNP and per capita terms is far higher than is the contribution made by the United Kingdom?

Mr. Mason: That was an excellent contribution by my hon. Friend. He rightly says that we believe in collective security. Part of our collective security system is within NATO, in which we play our part. At the end of the defence

review I hope it will be shown that we shall still make a positive contribution.

Lord Balniel: asked the Secretary of State for Defence what are the principles on which he settles the level of defence expenditure.

Mr. loan Evans: asked the Secretary of State for Defence what principle he will be guided by in determining the level of defence expenditure in the review that he is now conducting; and if he will make a statement.

Mr. Mason: I refer the hon. Members to my reply to my hon. Friend the Member for Ilkeston (Mr. Fletcher) on 21st March—[Vol. 870, c. 153-4.]

Lord Balniel: I welcome the statement made earlier this afternoon that to fix the level of defence expenditure to the average paid by our allies is an utterly mistaken principle, but how does this square with the principle set out in Labour's General Election manifesto? Surely the right principle is to ensure that within our economic strength, in conjunction with our allies, we afford what expenditure we can to meet the expenditure of any potential aggressor.

Mr. Mason: I laid down the principle that we intend to maintain a modern and effective defence system while reducing its cost as a proportion of national resources. That is the main principle on which we stand. We also indicated in the manifesto that we would look at the GNP figure compared with NATO and try to bring the figures into line with those of our major European allies. That is still the commitment.

Mr. Evans: In making his review, will my right hon. Friend pay regard to the fact that we have now the highest balance of payments deficit, of over£4,000 million? Will he also have regard to the fact that in Europe there are countries with a balance of payments surplus which spend less on defence than we do?

Mr. Mason: I am sure my hon. Friend will be aware that our NATO allies know our economic circumstances and well understand why a defence review is imminent.

Mr. Wiggin: Does not the right hon. Gentleman agree that since most of our


NATO allies have conscripted forces a straight comparison is fraudulent?

Mr. Mason: The hon. Gentleman is quite right, but I have tried to indicate many times in this House that the GNP figure in relation to NATO is only one of the criteria; there are other factors to take into consideration. In absolute terms some NATO countries spend more money than we do on defence; some use conscripted forces as well.

Recruiting

Mr. Biften: asked the Secretary of State for Defence what are the current trends in recruiting to the Armed Services on the basis of the latest available information; and if he will make a statement.

Mr. Mason: I am glad to say that the small but hopeful improvement in recruiting first noted at the beginning of the year appears to be continuing. However, it is too soon to predict how the situation might develop.

Mr. Bitten: For the benefit and enlightenment of his hon. Friends the Members for Preston, North (Mr. Atkins) and Salford, East (Mr. Allaun), will the right hon. Gentleman agree with my hon. Friends and myself that we should welcome the reversal in recruitment trends and place on record the fact that a prudent regard for national defence must require significantly larger forces than we currently possess?

Mr. Mason: I would not agree that it is necessary to have significantly larger forces than we possess at present, but in terms of total strength in the Armed Forces the figure is 349,000. Since the forecast total strength in last year's White Paper was 353,000, there has been a discrepancy over the year of about 1 per cent.

Mr. Kinnock: Does my right hon. Friend agree that if mansions were given to all naval sub-lieutenants and all Army captains this might have a remarkable effect on general recruitment, especially among homeless young people?

Mr. Mason: If we were able to offer homes to all our Service men this would no doubt have a great effect, but we cannot talk in those terms yet.

Mr. Younger: Will the Secretary of State give an idea of how this small but

welcome improvement in recruitment affects each of the three Services? Is the Army participating fully in the improvement?

Mr. Mason: In the past the Army has suffered most and the Royal Air Force least, but since we are now getting over the hump in respect of the problem of the raising of the school leaving age the Army figures are beginning to improve.

Rear-Admiral Morgan-Giles: In considering the recent report of the Armed Forces Pay Review Body and the princely award of 50p per day to soldiers fighting in Belfast, did the Secretary of State take into account the effect of pay awards on recruiting?

Mr. Mason: Yes, Sir. One of the reasons for making the statement as quickly as we did was that we wanted to help recruiting. I felt that morale in the Armed Forces might be affected because of the problem of pay. The award of 50p a day—which amounts to£3-50 per week—for service in Northern Ireland has helped the situation considerably.

Multi-role Combat Aircraft

Mr. Thorne: asked the Secretary of State for Defence if he will make a further statement on the development of the multi-role combat aircraft.

Mr. Stanley: asked the Secretary of State for Defence if he will make a statement on the multi-role combat aircraft.

The Under-Secretary of State for Defence for the Royal Air Force (Mr. Brynmor John): Ground testing of the first MRCA prototype has been going well and the aircraft is expected to make its maiden flight very soon. Other than that, I have nothing further to add at this stage to the statement made by my hon. Friend on 9th April—[Vol. 872, c. 133-6.]

Mr. Thorne: Will my hon. Friend give some up-to-date figures of the cost of this aircraft? Does he agree that increasing credence is being given to a figure of£9 million? Why is it not possible to give the House an accurate estimate of what the cost will be?

Mr. John: On the first point raised by my hon. Friend, I am happy to be able to say that the figure of£9 million is a wild exaggeration. On the second


part of his question he will recognise, as my hon. Friend the Member for Stockton (Mr. Rodgers) said in the defence debate, that we are looking at what additional information can be disclosed to the House. It would be the object of my Department to reveal to the House as much information as possible.

Mr. Stanley: Does the Minister agree that other than the MRCA there is in Western Europe no military aircraft with a comparable performance to the MiG 23 which is already in service in the Warsaw Pact countries? Is not an inevitable result of not proceeding with the MRCA that it will force us to buy American or, alternatively, to accept a permanent aerial inferiority in Western Europe?

Mr. John: The problem in providing a cost-effective aircraft is always to match performance with cost. The hon. Gentleman is right to say that buying off the peg will not necessarily make the cost of defence to this country any cheaper.

Mr. Wellbeloved: Will my hon. Friend make available to the House figures for alternatives to MRCA, and will he clarify why the figures given in the Federal Republic of Germany include manning and ground support costs during a period of 10 to 15 years of operation of the MRCA? Does he not agree that the fly-away cost to the United Kingdom will be about£3-2 million per aircraft?

Mr. John: Until our study of these figures and the information which can be released are finalised, I cannot even reply to the siren voice of my hon. Friend the Member for Erith and Crayford (Mr. Wellbeloved). However, that information is being looked at and as much as possible will be released to the House.

Mr. Michael McNair-Wilson: Has the Secretary of State met his German counterpart since the election of the new German Chancellor, and is there any sign of the Germans changing their attitude towards the MRCA?

Mr. John: My right hon. Friend is meeting his counterpart tomorrow.

Commitments

Mr. Lee: asked the Secretary of State for Defence if he will now make a

statement on his policy towards the United Kingdom's defence commitments.

Mr. Mason: I would refer my hon. Friend to the answers I gave to my hon. Friend the Member for Ilkeston (Mr. Fletcher) on 21st March—[Vol. 870, c. 153-4.]— and the hon. Member for Tyne-mouth (Mr. Trotter) on 5th April.—[Vol. 871, c. 451.]

Mr. Lee: Do not the number of spectacularly tragic incidents all over the world, ranging from Dublin to the Middle East, demonstrate the utter futility of a defence policy based upon weapons of mass destruction? May we be assured that when the review is completed it will result in very large economies?

Mr. Mason: Weapons of mass destruction could involve the strategic deterrent, and I thought that that had helped to maintain the peace for the past 30 years.

Mr. Buck: Will the Secretary of State clear up one point? In calling for the review, has any note been taken of the Labour Party conference resolution demanding a£1,000 million cut in defence?

Mr. Mason: We have noted it, of course. It would be right for Her Majesty's Government to do so. But I refuse to be bound completely to£1,000 million. What is more, it is not in the Labour Party's manifesto. In any event, it would require a majority in the Labour Party to commit either the national executive or the Government.

Republic of Ireland (Defence Minister)

Mr. Molloy: asked the Secretary of State for Defence if he will make arrangements to meet the Defence Minister of the Eire Government.

Mr. Mason: I have no plans to do so at present.

Mr. Molloy: Does my right hon. Friend agree that inasmuch as the terrorist tactics and weapons used on the civilian populations of Dublin, Belfast and London constitute the most loathsome form of military attack, he and his opposite number in Eire should try to find a form of liaison to have a joint endeavour against this form of attack on civilian organisations by these terrible paramilitary terrorists?

Mr. Mason: I agree fully with my hon. Friend. First of all, there is scope for much closer co-operation on security and on the border. My right hon. Friend the Secretary of State for Northern Ireland has already had talks on that basis. As I said earlier, if there were any specific subjects to discuss and a convenient opportunity arose I should be perfectly prepared to talk to my opposite number in Eire.

Mr. Amery: In view of the reported failure of the Armed Forces to assure the march of trade unionists in Belfast this morning, will the right hon. Gentleman take steps to intensify the training of the Armed Forces in picket-breaking in support of the civil power?

Mr. Mason: That supplementary question does not flow from the original Question, which relates to Eire and not to Northern Ireland. Our troops are well trained and are doing a magnificent job in a remarkably restrained manner in very difficult conditions. I hope that the right hon. Gentleman will take time out to go to see them and to praise them.

Forces' Pay

Mr. Hurd: asked the Secretary of State for Defence if he has yet received the report of the Armed Services Pay Review Body; and if he will make a statement.

Rear-Admiral Morgan-Giles: asked the Secretary of State for Defence what consideration he has given to further increases in pay and allowances for Service men.

Mr. Mason: I refer the hon. Members to the reply given to my hon. Friend the Member for Ilford, South (Mr. Shaw) by my right hon. Friend the Prime Minister on Thursday 16th May.—[Vol 873, c. 518-20.]

Mr. Hurd: It would be churlish not to thank the Secretary of State for what he has achieved in this respect on behalf of the Armed Forces, but will he look at one point which was not included in the Prime Minister's answer? It concerns the level of gratuities paid at the end of terms of service. If they were increased, might not the result be a saving to public funds since more Service men would be able to find deposits for homes of their own instead of being

obliged to add their names to local authority housing lists?

Mr. Mason: I am obliged to the hon. Gentleman for that suggestion and I will look at it. The White Paper has not yet been published and will not be published until 29th May. There may be further indications in it along the lines that the hon. Gentleman has mentioned. If there are not, I shall look at his suggestion.

Rear-Admiral Morgan-Giles: Although the morale of the Armed Forces is superlative, and although pay is not uppermost in their minds, does the right hon. Gentleman think that 50p a day is the rate for the job for Service personnel serving in Ulster?

Mr. Mason: The hon. and gallant Gentleman should realise that apart from the£3-50 a week they benefited from the increase in the X factor. The Pay Code frustrating the Armed Forces Pay Review Body was imposed upon it by his own administration. The review body could recommend only an increase from 5 per cent, to 8| per cent, in the X factor. But it sought consent to increase it to 10 per cent. It means that our forces in Northern Ireland have an increase of 100 per cent, in the X factor and also£3·50 a week.

Dr. M. S. Miller: Would it be possible for my right hon. Friend to give consideration, in respect of Armed Forces Pay Review Body payments, to the possibility of some kind of ex-gratia payment to Service men who meet with accidents when they are not actually on duty?

Mr. Mason: To be honest I have not done that, although I have some cases before me. Indeed, I think I have one from my hon. Friend.

Major-General D'Avigdor-Goldsmid: May I ask the Secretary of State two questions? The first concerns the pay increase. Although it is understood that the pay increase will be backdated to 1st April, when will the increase be received in kind by soldiers, sailors and airmen? Secondly, will any consideration be given to the Territorial Army? Should not members of the Territorial Army be considered eligible for the X factor when they are serving in camp?

Mr. Mason: I do not think the House will accept that members of the TAVR


should be eligible for the X factor especially when they go to camp. They are obliged to train one or two nights a week, and occasionally they go to a weekend camp. But I cannot see any reason why they should be included in the X factor. As for the hon. and gallant Gentleman's second question about the date on which the increase will be paid, most Service personnel will receive some of their pay in June.

North Sea Oil Rigs

Mr. Jessel: asked the Secretary of State for Defence if he is satisfied with the arrangements for defending North Sea oil rigs.

Mr. Judd: Yes, Sir. I would, however, refer the hon. Member to my reply on 9th April 1974 to the right hon. Member for Orkney and Shetland (Mr. Grimond).—[Vol. 872, c. 81.]

Mr. Jessel: Will the hon. Gentleman comment on the strategic aspect? Are there not great dangers in our becoming too dependent for our national economy on the supply of oil from the North Sea when the rigs are obviously vulnerable to air or sea attack, especially in the light of the expansion of the Soviet Navy? Is there not also a risk of sabotage or blackmail by extremist organisations?

Mr. Judd: I am sure that the House is interested in the hon. Gentleman's observations. However, he will appreciate that it would not be in the public interest to give details of our assessment of the military or the terrorist threat.

Mr. Gordon Wilson: Does the hon. Gentleman accept that a Scottish Government would be prepared to take away from the Secretary of State any problems that he might face in defending these oil rigs?

Mr. Judd: The House always notes with interest the views of minorities in its midst.

Mr. Buck: Does the hon. Gentleman agree that the Royal Naval Reserve very likely has a part to play here? When will he be able to tell us the results of the report, initiated by the previous administration, on the role of the Royal Naval Reserve?

Mr. Judd: The review initiated by the hon. and learned Gentleman into the

reserves is proceeding apace. 1 shall naturally inform the House of the results as soon as possible. The hon. and learned Gentleman may be glad to know that I recently had a very happy day at sea with the reserves.

Mr. Younger: Will the hon. Gentleman note that the vast majority of people in Scotland are extremely proud of their contribution to the Royal Navy and would rather have the oil defended by the Royal Navy than by anyone else?

Mr. Judd: I note what the hon. Gentleman has said. I know that the Royal Navy is grateful for the stalwart assistance given by the Scottish people to its work.

American Secretary of State

Mr. Dixon: asked the Secretary of State for Defence what discussions he expects to have with the American Secretary of Defence.

Mr. Mason: As I announced in last week's defence debate, I am looking forward to visiting Washington for my first meeting with Mr. Schlesinger on 29th May. There will be many matters of mutual concern for us to discuss, particularly of course in the context of the North Atlantic Alliance. The meeting will also give me an opportunity to reaffirm the importance
attached by the Government to our links with the Americans.

Mr. Dixon: When the right hon. Gentleman reflects that the armed forces of America are larger than those of the whole of the European members of NATO and that withdrawal of those forces would leave the whole of Western Europe to be overrun by our enemies, the Russians, may I ask whether, in his discussions with his American colleagues, he will talk more about the relationship of our gross national product compared with that of the United States and not those of European members of NATO?

Mr. Mason: I know the hon. Gentleman's views, with some of which I agree. However, he will have noticed recently that President Nixon stated that as long as the NATO nations maintained their efforts there would be no question of American withdrawal. It will be our duty to maintain our effort and help to keep the Americans within the NATO Alliance.

MINISTERIAL ADVISERS

Mr. William Hamilton: asked the Prime Minister why he refuses to publish details of the individual salaries paid to the staff of Dr. Donoughue's unit.

The Prime Minister (Mr. Harold Wilson): I have already informed the House of the total cost to public funds, including salaries, of Dr. Donoughue's policy unit.

Mr. Hamilton: I know that my right hon. Friend has given the global figure of£35,000. Why will he not give the individual figures? He knows my salary and I know his. Why should we not know the salaries of Dr. Donoughue, Mrs. Carmichael, Mr. Andrew Graham, Mr. Richard Graham, Mr. Richard Kirwan, Mr. David Piachaud, Mr. Adrian Shaw and Mr. Gavin Davies? Either we get them or my right hon. Friend should cease to talk about open government.

The Prime Minister: My hon. Friend and I and all members of Dr. Donoughue's policy unit fully earn our salaries. We have followed the precedent set by my predecessor when, in the case of the appointment of the CPRS, the total figure and the salary of the head of the unit were given, as has been done with Dr. Donoughue but not the individuals. In many cases—whether the CPRS or in this instance—when individual salaries are negotiated regard is inevitably given to what people were previously earning. It has not been the practice in such cases to publish the figures.

Mr. Bruce-Gardyne: So that taxpayers may know what they are getting for the£35,000, may I ask whether any members of the political Mafia feature with some of the right hon. Gentleman's junior Ministers on the list of those to whom sensitive documents have to be denied for security reasons?

The Prime Minister: For the hon. Gentleman's question to have any meaning would mean that the story he so readily believed this morning was true. In fact there has been no change in the arrangements by which such material is available to those who need to know it— "need to know" is the basis of security— whether Ministers or officials, in the proper performance of their duties. Con-

trary to this morning's story, which is totally without foundation, no distinction is made under this Government, any more than I understand there was under the previous Government, on the basis of the individual Ministers concerned, and members of Dr. Donoughue's unit are not Ministers.

Mr. Atkinson: Does my right hon. Friend agree that he has two distinct functions in regard to policy, one as Prime Minister and the other as Leader of the Labour Party? Does he also agree that the function concerning political and policy research should rightly be connected with the Labour Party? Therefore, will he look at the whole question of transferring Dr. Donoughue's staff to the Labour Party, paid for by the Government—[HON. MEMBERS: "Oh!"]—and initiate talks with the Leader of the Opposition to make sure that every party represented in this House has equal facilities in the formulation and research of party policy?

The Prime Minister: Not being a schizophrenic, I have never been able to distinguish between the position of Prime Minister and leader of a party, whatever party happens to be in power. That is essential in democracy.
Regarding the formulation of future policy for the manifesto for the forthcoming election, under the constitution of the Labour Party that is a matter for the national executive committee based on the programme from conference and finally approved by a joint meeting of the representatives of the parliamentary party and the national executive committee. My hon. Friend will know that the national executive committee is extremely active in work to that end.

Mr. Hamilton: On a point of order, Mr. Speaker. In view of the secret nature of the reply, I beg leave to give notice that I shall seek the earliest possible opportunity to raise the matter on the Adjournment.

GOVERNMENT POLICY (PRIME MINISTER'S SPEECH)

Mr. Norman Lamont: asked the Prime Minister whether he will place in the Library a copy of his speech at


Glasgow on 5th May on Government policy towards the Press.

Mr. St. John-Stevas: asked the Prime Minister whether he will place in the Library a copy of his speech of 5th May at Glasgow about the difficulties facing the Government.

Mr. Skinner: asked the Prime Minister if he will place in the Library a copy of his public speech made on 5th May at Glasgow on economic matters.

Mr. Wyn Roberts: asked the Prime Minister if he will place in the Library a copy of his speech at Glasgow on Government policy.

Mr. Nigel Lawson: asked the Prime Minister if he will place in the Library a copy of his public speech at Glasgow on 5th May on the Government's problems.

Mr. Kin nock: asked the Prime Minister if he will place in the Library a copy of his public speech at Glasgow on 5th May on the implementation of Government policies.

The Prime Minister: I did so the following day, Sir.

Mr. Lamont: With reference to the Prime Minister's absurd suggestion in that speech that certain sections of the Press were out to make Parliament unworkable, why is it that he still cannot realise that the function of the journalist and the television man is limited to getting news and getting it into newspapers and on to television? Does not the Prime Minister realise that those are not my words but are a quotation from his secretary, Mrs. Williams, in her description of his own attitude to the Press?

The Prime Minister: Yes, Sir. Concerning what I said in the House, the Press would fail in these endeavours if it were not for the fact that certain Members of the Opposition had aided it in what it was trying to do. On the general question, the House had an extremely constructive debate on the Press last week. I would refer the hon. Gentleman to the somewhat lengthy speech I made last Tuesday on all the points he has raised.

Mr. Skinner: Is not the fact of the matter that in that speech the Prime

Minister's words were to the effect that there was a clear intention that certain sections of the Press and Tory back benchers wanted to make this Labour Government unworkable? If that is so, has not my right hon. Friend an obligation to the Labour Party and its supporters outside the House to seek a fresh and full mandate? Would not this week be a most appropriate time to do that?

The Prime Minister: No, Sir. I said that there were some who were seeking to make Parliament unworkable and who had obviously failed. But my hon. Friend is certainly nattering right hon. and hon. Members of the Opposition——

Mr. Skinner: I would never do that in my life.

The Prime Minister: It is most uncharacteristic, but for once my hon. Friend is flattering them if he is suggesting that they are making Labour government unworkable. The successes of the present Government are clear to the whole country, as we have seen, and hon. Members opposite know that. They are whistling to keep up their spirits, which are not very good these days. But certainly Conservative Members—I defend them from my hon. Friend's charge— have not sought to make the Government unworkable, because they never vote against any major Government measure.

Mr. St. John-Stevas: Was not the point about that speech that the invective and innuendo that was indulged in against unnamed newspapers and unnamed Members of Parliament are calculated to bring this House and the Press into disrepute? Could not the right hon. Gentleman for once, either inside or outside the House, speak like a Prime Minister?

The Prime Minister: There are certain precedents that I would not want to follow —despite the fact that the hon. Gentleman used to brief him. But concerning imputations against the Press, if they have been condemned by anything I said, it was not by my words but by their actions in certain cases. The hon. Gentleman objects to people being unnamed, but I am surprised that he wants to rise and identify himself.

Mr. Kinnock: Does not my right hon. Friend think that by the vehemence of that speech he may inadvertently have


won some sympathy for Her Majesty's loyal abstentionists, so much so that a former Labour voter is now willing to let bygones be bygones and to take the Conservative Party into his protective care? Will my right hon. Friend explain why the Conservative Party seems to be more worried about the fact that Labour has lost that vote than the fact that it is gaining that vote?

The Prime Minister: I am always trying to invoke sympathy for people suffering, as I said in that speech, from withdrawal symptoms. Concerning the Conservative Party, however, there is no ministerial responsibility for anything that it does—nor, apparently, is there Opposition responsibility either.

Mr. Roberts: Does the Prime Minister agree with Miss Joan Maynard's view that the best way to get rid of muckraking is to get rid of the muck?

The Prime Minister: Yes, Sir. That is certainly true. Indeed, because of great anxiety on certain matters among a very small minority of local authority representatives, the Leader of the Opposition rightly set up the inquiry under Lord Redcliffe-Maude—who has now reported; I hope that his report will be available in a day or two—and I have announced the establishment of a Royal Commission on corruption. If the hon. Gentleman is sensitive about my use of the word "muck-raking" in that speech, I shall try in future, in respect of certain hon. Members of the Opposition, to give up using that word and to use the words "smearing" and "mud-slinging" instead.

Mr. Lipton: Is it fair to blame the Press entirely for making Parliament unworkable when the Opposition Chief Whip himself made a notable contribution to that end last night?

The Prime Minister: I am sorry that I was not able to be present last night, but I will study the record.

Mr. Lawson: In addition to displaying his persecution complex, in that speech the Prime Minister touched on industrial relations. Can he, therefore, explain to the House why his right hon. Friend the Secretary of State for Northern Ireland deplores political strikes whereas his right hon. Friend the Secretary of State for Employment exalts them?

The Prime Minister: That question was very laboured. As to a persecution complex, the hon. Gentleman will know that I used to enjoy all the attacks he made on me, both when he was a City editor and when he was editor of the Spectator: there was no question of that. My hon. Friend the Minister of State, Northern Ireland Office rightly deplored, as I hope all Members of the Opposition deplore, what has been happening in Northern Ireland this week. This is not only a political strike; it is a sectarian strike which is aimed at destroying decisions taken by this House of Commons, both as regards power sharing and by the elected Assembly. It is being done for sectarian purposes having no relation to this century but only to the seventeenth century.
With regard to what my right hon. Friend the Secretary of State for Employment has said on these matters, he has rightly referred to the ultimate right, which has been accorded by all Governments, to strike on industrial and economic matters. However, in so far as the previous Government tried to inhibit that with the Industrial Relations Act, when the crunch came they never dared to use it.

Mr. Bidwell: Does my right hon. Friend agree that when he announced his intention to set up a Royal Commission on the Press he was being far too kind to the Press when he talked about the appalling lack of public faith in the Press? I think that those were more or less his words. Is it not, in effect, a healthy public scepticism about the Press? If that were not so, my right hon. Friend could never have been returned as Prime Minister again.

The Prime Minister: I think that we dealt with these matters fully. Most hon. Members, on both sides of the House, dealt with these matters fully and very fairly in the debate last Tuesday. What was then said about the Press, whether friendly or critical—there was a mixture of both—has been fully accepted by most sections of the Press.

Mr. Heath: The Prime Minister knows —I will reassert it in the House in public—that Her Majesty's Government will have every possible support from the Opposition in dealing with the situation which has arisen in Northern Ireland. We


believe that they should take all necessary action with the security forces to ensure that barricades are not allowed to remain, because we have learned the lesson of what happens when they are built up for some days. In all of this the Prime Minister is aware that we shall support him entirely, knowing that this is a political strike against the creation of the Assembly, against the Executive and against the Sunningdale Agreement.
Is the Prime Minister aware that in supporting him and his administration against a political strike we believe that he must now recognise that respect for authority is indivisible, and that whereas he and his colleagues were prepared to support political strikes in this country against an action approved by Parliament we shall not do that. We will support the established Government in Northern Ireland.

The Prime Minister: I am only too ready to agree that in the matter of Northern Ireland the right hon. Gentleman and his colleagues have given this Government the same full-hearted support on everything that it has been necessary to do, within the basis of a continued policy involving a series of Governments, as we gave to the right hon. Gentleman's Government—and that was totally extended both by voices and in the Division Lobby.
However, if the right hon. Gentleman draws any parallel whatsoever between what is going on in Northern Ireland— intimidation, clubbing, threats to wreck any shop which remains open to supply food, interference with food and the rest of it—and anything that happened on the Industrial Relations Bill, it proves once again that he does not understand the trade union movement of Great Britain, and he has almost suggested that he does not understand what is going on in Northern Ireland.

Mr. Heath: What I do understand is that when the Government are really faced with a situation, as they are in Northern Ireland, they are forced to stand, and when they are in opposition they will always give way to political action in this country and to intimidation.

The Prime Minister: The right hon. Gentleman always has an obsession about

this. [Interruption.] Of course he has. It was the obsession which brought the three-day working week and which planted him back on that bench. There is no parallel, as the right hon. Gentleman
knows.

ARMS EXPORTS

The Prime Minister (Mr. Harold Wilson): With permission, Mr. Speaker, I should like to inform the House of further Government decisions regarding the supply of arms to Chile and South Africa.
The Government have now completed their review of the contracts covering the overhaul of aero-engines and the supply of engine spares by Rolls-Royce (1971) Ltd. to the Chilean Air Force, and have been in touch with Rolls-Royce So far as overhaul is concerned, the contract between the company and the Chileans provides for termination on three months' notice. Rolls-Royce will exercise this contractual right at the Government's request. The policy on spares for these aircraft and their engines should obviously be consistent with the policy on overhaul, and contractual obligations to supply spares will also therefore have to come to an end. [HON. MEMBERS: "Disgraceful!"]
In the case of South Africa the Government have decided that the export licence for one Westland Wasp helicopter, the remaining one of the series, delivery of which was outstanding when we came to office, is to be revoked.

Mr. Heath: Is the right hon. Gentleman aware that this further capitulation to his Left wing will merely earn him and his colleagues further contempt? May I ask the right hon. Gentleman to be more specific on the part of his statement in which he said that Rolls-Royce will exercise this contractual right at the Government's request? This is an ambiguous sentence in the right hon. Gentleman's statement, perhaps due to hasty drafting, but have the Government exercised this request to Rolls-Royce and has the company accepted the Government's request? Are we to understand that from the right hon. Gentleman's statement? If the Government have already asked Rolls-Royce to exercise the right to break the contract, are


the Government also ensuring that three months' work will now take place on the overhaul of the engines?
The right hon. Gentleman said that it is logical that spares should not now be supplied, but I understand that servicing can take place in other countries. Other Governments treated by the British Government in this way would be able to get their engines serviced, but is it not true that no other country will be able to supply spares unless the Government wish to encourage an indirect traffic to other countries so that the spares can be supplied to Chile?
So far as the Westland Wasp is concerned, was it not part of the agreement of the last Government to carry out the Simonstown Agreement? What justification is there for revoking the licence for this helicopter?
Will the Government recognise that treatment of this sort of another Government because they dislike that other Government's political views is gravely damaging to British trade and industry and to jobs for people in this country? Is the right hon. Gentleman prepared to tell the country what the consequences of this action will be, and will he also say what is the position about the supply of submarines and other naval equipment?

The Prime Minister: The right hon. Gentleman referred to contempt, yet nothing brought this country more into contempt than the right hon. Gentleman's lickspittle attitude to the Chilean revolution. If Opposition Front Benchers got the information which we got about the treatment of Dr. Allende they would not regard it as a laughing matter.
I will qualify what I have just said to the right hon. Gentleman. His attitude to South Africa was even more contemptible. His decision to supply arms to South Africa was announced by his Government before the Cabinet met, such was the obsessed determination on their part.
So far as Simonstown is concerned, we disagreed with the statements made by the right hon. Gentleman which wrecked one Commonwealth conference because of his obsession.
With regard to contracts, I made clear that if the right hon. Gentleman tried to tie up the incoming Labour Government

with further contracts we would not regard those contracts as binding. They are in defiance of the United Nations resolution which the right hon. Gentleman has always treated with scorn.
The right hon. Gentleman asked about Rolls-Royce exercising its contractual right at the Government's request. We have requested this and Rolls-Royce has agreed to our request, but I take full responsibility for this. Rolls-Royce will do this. I am surprised—well I am not surprised, but I regret that the right hon. Gentleman did not take some action.
The right hon. Gentleman talks about other countries undertaking servicing. This is the traditional policy of the prostitute throughout the ages—"If I don't do it, somebody else will".

Mr. George Lawson: Is my right hon. Friend aware that one of the great principles in the Labour movement, as I have always understood it, is that we should avoid double talk and double think at all costs? Would my right hon. Friend be prepared to treat Russian dictatorships on the same kind of basis—[Interruption.] Is my right hon. Friend aware that there is no distinction at all in the mode of behaviour in the Soviet Union and in the satellites of the Soviet Union? Therefore, is he prepared to behave in the same way towards dictatorships whose shirts happen to be red, as distinct from other dictatorships?

The Prime Minister: We do not supply arms to the Soviet Union. What I have announced this afternoon is that we are going to stop the policy of the previous Government of supply arms to Chile and to South Africa.
So far as the Soviet Union is concerned, I was myself involved with negotiating the Comcon agreements for stopping on a NATO basis the supply of arms to the Soviet Union and to members of the Warsaw Pact. Therefore, my hon. Friend's high-flown oratory is entirely beside the point and so is the cheering of hon. Members opposite.

Mr. Heath: Perhaps the Prime Minister could answer my question, especially in view of the last part of his answer to the last supplementary question, in which he used the general term "arms", on the position with regard to naval equipment for Chile. Can he also answer the


other question I asked him, which was whether there will now be three months' work on the overhaul of the engines which are over here? In other words, as a result of the Prime Minister's further capitulation, will r. Scanlon tell the workers concerned that they must now work for three months?

The Prime Minister: I regret that I did not answer those two questions. I was interrupted by Conservative Members. The matter of the ships was dealt with in a statement by my right hon. Friend the Foreign and Commonwealth Secretary a few weeks ago, and what he then announced remains the position.
The contracts to which the right hon. Gentleman has just referred, are of course under the three months' break clause, in force during that period. It is a fact that for some considerable time workers engaged on the work—a total of 16, I think, which is 1 per cent, of the total employed at East Kilbride—have refused to do it. If the right hon. Gentleman can suggest how they can be made to do the work, perhaps he will help the House in the matter. By the workers' own decision, the work has not been going on for several weeks. The contract remains until the end of the three-month period.

Mr. Fernyhough: Does not my right hon. Friend agree that there are many precedents for his decision? A National Government dominated by the Conservatives in 1936 adopted a nonintervention policy in Spain and broke contracts, and in the recent Middle East war the then Government refused to carry out their contract with either side. Does not my right hon. Friend agree that in 1951 we broke a contract with Poland, which had paid for two tankers built in my division, and the tankers were not delivered? Does he not also agree that the decision befits a Labour Government, because the Lancashire cotton workers 110 years ago, rather than use cotton from the slave States, were prepared to walk the streets hungry?

The Prime Minister: I am not sure that we need to go back that far for justification for the acts I have announced, although it is a fact that on that occasion, too, the London Establishment was in favour of the slave owners. Without going back over the other cases

mentioned by my right hon. Friend, I would say that the precedent for what I have announced on South Africa was one of October 1964, which was denounced by Conservative right hon. and hon. Members.

If one wants to look for precedents on Chile, one recalls that the previous Government cut off spares and ammunition for Israel, which is a democracy. It does not have an oppressive Fascist Government, which Chile has, and one which the previous Government gave aid and comfort to. The previous Government were also different from other European Governments in their treatment of refugees and prisoners.

Sir Frederic Bennett: Can the Prime Minister confirm that the aero-engines in question will be serviced in future in Brazil, which already has a military regime? Can he say also whether we have given assurances to Brazil that we shall not interfere with our arms trade with that country? Will he further elucidate what one military regime has that another has not, except possibly that trade with Brazil is more important than that with Chile?

The Prime Minister: I was not talking about trade today; I was talking about arms. This has been a consistent policy of successive Governments. If the Brazilian Government wish to service the aero-engines, that is a matter for them. I am not responsible for the Brazilian Government. This democracy will not do so.

Mr. Flannery: Does not my right hon. Friend agree that it is in the true traditions of the Conservative Party that they so rabidly support the Fascist Chilean junta?

The Prime Minister: As I have said, many European countries, including some members of the European Economic Community and others outside, took a very different line on the availability of their embassies to people who were fleeing from persecution and murder. We have changed that rule as well since we came to office.

Mr. Russell Johnston: Does the Prime Minister agree that the moral basis of his statement is that he takes the view that this country should not supply arms to countries which might, or would, use


them for what we would regard as indefensible internal coercion? If that is the case, would there have been any justification for denying frigates to Allende? Secondly, if that is the justification—and there must be justification—when does the right hon. Gentleman intend to announce a general policy on the sale of arms, indicating the circumstances in which we shall sell arms and the circumstances in which we shall not? We cannot proceed in an ad hoc way.

The Prime Minister: I do not apologise to the House for having announced today what is right in our view in the case of Chile and South Africa. In regard to Chile, I cannot accept what the hon. Gentleman said about the supply of frigates to the Government of Dr. Allende. As for South Africa, it has been the view of our party, and I thought that it was the view of the hon. Gentleman's party—he will correct me if I am wrong—[An hon. Member: "It is the Young Liberals."] No, I think that it is the old Liberals as well. I think that it has been the policy of both of us, but not of the Conservative Party, that we should not supply arms to South Africa. [Interruption.] It is not only because of the possible use against the civilian population, but because we do not believe we should continue to supply arms to a Government who have been, on so many matters, outlawed by the whole world civilised community, apart from a few abstentions by the former Conservative Government. We are acting in accordance with the decisions of the United Nations, which I thought the Liberal Party also supported.

Mr. Faulds: Is my right hon. Friend contemplating the supply of Centurion or Chieftain tanks to Israel while that country is in defiance of United Nations resolutions and in occupation of Arab territories?

The Prime Minister: My statement referred to Chile and South Africa. When we are ready to make a statement on the Middle East and arms supplies, we shall make one.

Mr. Amery: Is not the Prime Minister aware that by condemning a political strike in Ulster and in the very next breath announcing capitulation to Mr. Scanlon's pressure he has achieved a

degree of silliness, inconsistency and indecency which amounts to political streaking?

The Prime Minister: It may be necessary to remind hon. Members that that remark came from a very senior Foreign Office Minister in the previous Government. That explains most of the matters I am trying to deal with this afternoon. The right hon. Gentleman is more concerned to attack Mr. Scanlon than he ever was to attack the Chilean dictatorship when he was in office. He will have to justify that to his conscience one day.
With regard to the right hon. Gentleman's reference to Mr. Scanlon, the question of the aero-engines——

Mr. Adley: Where is the Foreign and Commonwealth Secretary?

The Prime Minister: He is in Washington, fathead—through you, Mr. Speaker—and he will not come back in Mao Tse-tung uniform either. I was trying to say to the House that Mr. Scanlon's intervention in the aero-engine matter came long after the Cabinet had become seized of the matter. It was made clear in a statement that the blacking had started long before Mr. Scanlon intervened. When Mr. Scanlon appealed last week to the shipyard workers to black their work as well, they refused to do so.

Mr. Kinnock: Will my hon. Friend accept that what he has said this afternoon will be music to the ears of true democrats throughout the world? He has made it clear that he and the Labour Party are the foes of dictatorships on whichever side of the Iron Curtain they happen to be. Further, does he appreciate that the idea of reviewing our whole policy on arms sales is very good and that by doing so we shall avoid difficulties in future such as the present position? Will my right hon. Friend take note that there is no question— [Interruption.] We are all aware of the views of the right hon. Member for Brighton, Pavilion (Mr. Amery.) We heard them during the Chilean debate. He is an upholder of Fascism in Chile. Will my right hon. Friend take note that he has made it clear that he has not capitulated to any section of opinion and that he has not shown the weakness that Conservative right hon. and hon.


Members displayed when they capitulated to the Fascist Regime in South Africa and the Fascist junta in Chile?

The Prime Minister: I believe that what I have said about South Africa will be supported by democracies all over the world, as it has been supported by the United Nations. I believe that the only people who are opposed to what I have said are the supporters of Conservative right hon. Gentlemen who have had an obsession about this matter. We announced on taking office that we were cutting off all arms sales to South Africa. Today we have dealt only with the remaining contract for a West-land helicopter, which will cause a significant change in relations between Great Britain and the Commonwealth. The members of the Commonwealth were horrified by the action of the Conservative Government in 1970. They made no secret of that. Great Britain has very great trading interests and interests generally with many African countries. Those countries will applaud the decision that I have announced.

Mr. Ian Gilmour: Will the right hon. Gentleman say whether the contract to supply spares to Chile is terminable on three months' notice or whether it is an indefensible and straightforward breach of contract? Secondly, will he say un-equivocably, in view of what we have read about the attitude of the Secretary of State for Industry, whether the supply of ships and spares to Chile will go ahead?

The Prime Minister: The aero-engines contract is subject to a three months' break clause, which is being invoked. The supply of spares is subject to a reasonable period of denunciation, and that is happening The denunciation is occurring. With regard to the ships and the spares, I refer the right hon. Member for Chesham and Amersham (Mr. Gilmour) to the original statement made by my right hon. Friend the Secretary of State for Foreign and Commonwealth Affairs in April. I forget the date, but I think he announced on 10th or 11th April the position regarding the ships and the spares for the ships.

MEMBERS' PAY AND ALLOWANCES

The Lord President of the Council and Leader of the House of Commons (Mr. Edward Short): The Government have recently considered the matter of Members' remuneration, in response to many representations to me, and to my predecessor, from both sides of the House. The present levels of parliamentary salary and allowances were fixed nearly two-and-a-half years ago on 1st January 1972 following the report on Ministers' and MPs' remuneration made by the Top Salaries Review Body under the chairmanship of Lord Boyle.
The Review Body said that it considered that there should be a major comprehensive review at intervals which would correspond roughly to once in the lifetime of each parliament of normal length, although it did not rule out the possibility of interim reviews at shorter intervals.
The Government do not feel that it would be right at the present time to review the level of Ministers' and Members' salaries as these would more properly form part of a major review. But, on the other hand, there is no doubt that the value of the various allowances which Members may draw to help them defray the necessary expenses they incur in the course of their parliamentary duties has fallen to a level which is causing serious difficulties for many Members. I have in mind the secretarial allowance, the motor mileage allowance, London allowance, and the allowance which covers the additional cost of overnight stays away from home.
The Government therefore intend to invite the Review Body to undertake an early review of the rates of these various allowances and to recommend the levels to which they should be increased. It is not intended to ask the Review Body on this occasion to review or advise on the basis of payment of the allowances.
I expect that a limited review of this nature would not take too long to complete.

Mr. Prior: The right hon. Gentleman has drawn attention to the greatly increased cost in recent years of the necessary expenses that Members have to


incur. We entirely agree that a review by the Boyle Committee is necessary. Will he consider whether Members' pensions should be included in the number of refer-neces which he is to make?
There is a growing feeling in the House that arranging a review once every four years or so does not meet the wishes of the House and that it is not such a dignified method of carrying out the changes as we would wish. Will the right hon. Gentleman have further thoughts on the automaticity of reviewing both Members' salaries and Members' allowances? I believe that many hon. Members now take the view that it would be far better if there were a reasonable scale rather than a review every four years or so. I know that that view does not enjoy Wholehearted support but that is the growing mood of hon. Members.

Mr. Short: I have a great deal of sympathy with the two matters that the right hon. Gentleman has raised about pensions and the review of salaries during the life of one parliament. I shall certainly consider those matters and I shall be happy to discuss them with right hon. and hon. Members from both sides of the House.

Mr. English: Is my right hon. Friend aware that although we are grateful for the prospect of an increase, the matter raised by the right hon. Member for Lowestoft (Mr. Prior) is one that perhaps could be initiated by the Boyle Committee after it has considered the interim review so that in a future Parliament the committee could report upon the matter early instead of late?

Mr. Short: I shall consider an automatic review of salaries when we consider the whole question of salaries, which will take place shortly.

Dr. Winstanley: Is it not time that we did away with the system whereby many hon. Members subsidise their work here with their earnings from outside? Is it not precisely the possibility of an hon. Member's undue financial dependence on his outside earnings which constitutes a possible threat to his freedom of action as a Member? Should not we deal urgently with the situation in which many hon. Members' secretaries are employed in the House on terms and conditions which would not be tolerated outside?

Mr. Short: The debate which we shall have tomorrow will be a proper occasion on which to deploy the hon. Gentleman's first point. There is a great deal of support for the hon. Gentleman's second point, and it is the sort of matter which we shall consider when we have a comprehensive review, when we can consider the whole basis of personal allowances.

Mr. Atkinson: Is my right hon. Friend aware that under the present arrangements there are London Members who are not entitled to any of the allowances that he has mentioned and who do not receive a penny from any of the sources which he has mentioned? Will the review include the question whether London Members should have an entitlement to some expenses and allowances rather than talking about the total amount of money? Can we have a guarantee that all London Members will have an entitlement to the allowances to which he has referred?

Mr. Short: My hon. Friend is in the unfortunate position of falling between two stools. He is not alone, but very nearly alone. I am trying to find a solution to this problem. I do not want to impede this inquiry, which Lord Boyle has promised to carry out very quickly, by asking him to look at this problem. If it is possible to find a solution before the comprehensive review, I will certainly find it. The major difficulty is that if we change the boundary we then take the other allowance away from some other hon. Members. This is a difficulty, but we will try to find a solution. If we cannot I will certainly give an undertaking that it will form part of the comprehensive review which is to take place before long.

Mr. Maude: Does the right hon. Gentleman recognise that not everyone in the House, and certainly not everyone in the country, believes that Members of Parliament should be automatically insulated from the effects of inflation? Is he aware that there would be considerable opposition to the idea of incorporating a cost-of-living increase in Members' salaries? On the other hand, when it comes to the allowances, may I ask him to recognise that when the secretarial allowance, for example, falls behind the rising cost of living, this affects not just Members of Parliament but their secretaries? Does he appreciate that this is


something which most people would understand is not just a selfish attempt by Members of Parliament to insulate themselves against the effects of inflation, for which they are partly responsible?

Mr. Short: I feel sure that the public will understand this and support this review. Certainly all the allowances have fallen well behind, while the salary levels for secretaries have risen. The travel allowance is now completely out of date. I realise that there are two points of view about Members' salaries. It is always difficult to choose the right moment in such a matter. There never is a right moment. There are always arguments against doing anything. I believe that there is a case for looking at the point put by the right hon. Member for Lowestoft about trying to ensure in some way or other that there is an automatic review from time to time of Members' salaries.

Mr. Strauss: While there may not be a strong case for considering increases in Members' pensions in view of the considerable improvement that has recently taken place, may I ask my right hon. Friend whether he is aware that there is a strong case for looking into the present scale of pensions for Members' widows? Will he place this subject high on the agenda of the Review Committee's programme?

Mr. Short: The two subjects are tied together because the size of the widow's pension depends upon the size of the Member's pension. If we look at pensions generally, this will be one of the points to be examined.

Mr. Tugendhat: Does the right hon. Gentleman accept that the great majority of recent entrants to this House will very much agree with the point made by my right hon. Friend the Member for Lowestoft (Mr. Prior) about the necessity of placing parliamentary salaries

upon a proper footing and making sure that they rise more or less in step with those of comparable sections of the community? Does he not also agree that since we are now tackling the whole question of Members' outside interests, we must look at salaries in that context and recognise that Parliament is an infinitely more time-consuming affair than it used to be?

Mr. Short: What the House is likely to do tomorrow will make this all the more urgent. I agree entirely with what the hon. Gentleman has said about the point raised by the right hon. Member for Lowestoft. There is a great deal to be said for an automatic review by a completely independent outside body.

Mr. Prescott: Is my right hon. Friend aware of the feeling among many hon. Members that the allowance system, particularly as it applies to secretarial work, is totally unsatisfactory? Is he aware that many of us are strongly of the opinion that permanent secretarial assistance should be provided by this House and not through the allowance system? Is my right hon. Friend further aware that, while we realise that there are difficulties, we believe that they could be overcome and that if they were we would then not have to go through this process of asking for increases in the allowances? Does my right hon. Friend realise that we want secretarial help which is guaranteed proper wages by the House?

Mr. Short: I imagine that that arrangement would be acceptable to a great many hon. Members. Equally, it would not be acceptable to a great many others who like to employ their own secretaries. I should be happy to receive the views of hon. and right hon. Members on this matter over the next few months, before we have a comprehensive view. The present review is a limited and urgent one on allowances, which I hope Lord Boyle will carry out quickly.

ADULT LITERACY RESOURCES BILL

4.8 p.m.

Mr Christopher Price: I beg to move,
That leave be given to bring in a Bill to establish a National Resource Council for Literacy to direct and co-ordinate action research into the extent and causes of illiteracy among adults; to develop and co-ordinate literacy teaching techniques and to make other provision to combat functional illiteracy among adults; to provide for a supplementary system of adult literacy teaching grants for local education authorities and to establish a Literacy Fund from which such grants may be made; and for related purposes.
I am gratified to see the Under-Secretary of State for Education and Science, the Secretary of State for Scotland and his Under-Secretary present, because I believe that this Bill foreshadows an important shift in educational resources that will have to be made within Britain over the next few years. It has only recently come to our notice that there are 2 million adult illiterates in Britain. That is an underestimate rather than an overestimate. Further, it is an estimate made on the old basis of the National Foundation for Educational Research which was concerned with the reading ability of a nine-year old, whereas the new standard that UNESCO wishes all countries to adopt is based on the reading ability of a 13-year old. If the new basis were taken into consideration, the number of illiterates would be very much higher.
The purpose of this Bill is to provide money so that local education authorities throughout Britain can take this task over from the voluntary agencies that have undertaken it hitherto. This is in no way to detract from the work of the voluntary agencies. They have filled a gap which the State has quite disgracefully been unwilling to fill for many years. The best-known voluntary agency is Cambridge House in South London which has 500 tutors operating on a one-to-one basis to help adult illiterates. But it is estimated that the present system of very few local authorities and many voluntary agencies looks after only about \ per cent, of adult illiterates who need aid.
This Bill coincides with a campaign being launched by the British Association

of Settlements. Many people will have heard some of the touching stories about the difficulties of attacking this problem simply because people are ashamed about coming forward and admitting to illiteracy. It is difficult to contact people. People cannot be contacted through the newspapers because they cannot read. I heard this morning about one local education authority operating a course for adult illiterates. The first thing that was done at that course was to give the pupils a form to fill in. We have to get away from that kind of thing.
That is why we need a completely new approach—and that approach can be set in motion only by a national council, which we have called a National Resource Council for Literacy, which can take control of the whole operation and make sure that the right teaching techniques and right methods are used, with tutors to try to discover the facts and the scope of the situation. It could institute further research so that we do not have to hear again an answer such as that which the Minister gave to a Question by my hon. Friend the Member for Bedwellty (Mr. Kinnock) the other day, when he said that he welcomed the amount of work being done but did not know how much was being done. That was one of the most unsatisfactory ways of putting it that I can imagine.
We see many reasons for this Bill. One of the most crucial has arisen as a result of the DC 10 crash in March outside Paris. The inquiry into that has not yet taken place but it has been fairly well established that that crash occurred because a man who loaded the aircraft could not read the instructions on how to shut the hatch. That tragedy highlights the need for this Bill, but I do not rely entirely on that kind of tragedy.
If we are to break this cycle of deprivation between school, home and work it is no good acting only on the school in terms of literacy. We have to provide a service for adults, too. We also have a responsibility to those of our citizens who, usually through no fault of their own, find themselves in this position, to relieve them, for sheer humanitarian motives, from the appalling situation in which they find themselves. Adult illiterates now walking about London are in exactly the same position as hon. Members would be when walking about


Peking or Moscow unable to read Chinese or Russian. These illiterates walk about in a strange graphic world, completely unable to live a normal life of the kind which most ordinary citizens take for granted.
In view of the length of time for which this Session may run, I am not totally hopeful that this Bill will go through all its stages in both Houses and finally be put into law this time. But ideas have to be launched in this way. The Department of Education—I am glad to see the Under-Secretary here—will very shortly have to make a statement about the Russell Report on adult education. I greatly hope that this Bill will encourage the Under-Secretary to make sure that in that statement on the report, adult illiteracy is made an absolute priority over other issues of adult education.
I very much hope that the introduction of this Bill will herald a time when we stop feeling that the education of children at school will solve all our educational and literacy problems, and when we look far more to what the French call education permanente, which has been translated into English in many forms—and that which I like best is "lifelong education". I hope that we can look forward to education being not just a short stint in childhood but a lifelong task. There are deprived adults who desperately need a chance to lead a full life. I hope that the next time the Under-Secretary makes a statement he will take these words into consideration, and that when this Bill is called for Second Reading he will smile upon it and tell the Whips to keep quiet and not shout "Objection".
Question put and agreed to.
Bill ordered to be brought in by Mr. Bryan Davies, Mr. Stan Thome, Mr. Geoffrey Pattie, Mr. Clement Freud, Mr. George Rodgers, Mr. Anthony Steen, Mr. Eddie Loyden, Mr. Neil Kinnock and Mr. Christopher Price.

ADULT LITERACY RESOURCES

Mr. Christopher Price accordingly presented a Bill to establish a National Resource Council for Literacy to direct and co-ordinate action research into the extent and causes of illiteracy among adults; to develop and co-ordinate literacy teaching techniques and to make other provision to combat functional illiteracy among adults; to provide for a supplementary system of adult literacy teaching grants for local education authorities and to establish a Literacy Fund from which such grants may be made: and for related purposes, and the same was read the First time; and ordered to be read a Second lime upon Friday 21st June and to be printed. [Bill 49.]

ADJOURNMENT DEBATES

The Speaker: I apologise to the hon. Member for Fife, Central (Mr. William Hamilton). I know that he wanted to raise a point of order but he was almost obliterated physically from my view by the hon. Member for Lewisham, West (Mr. Price).

Mr. William Hamilton: On a point of order, Mr. Speaker. 1 should like to put it on record, as the House will be aware, that I was an unwilling and very angry victim of the chaos in the House last night. I apportion no blame for that, least of all to the Chair, but I was standing amid an enormous number of Members when the Question was put and was unable to get to my place before the motion for the Adjournment was moved. Therefore, I was unable to take my Adjournment motion, which was on a very vital subject —nurses' pay and conditions. I hope, Mr. Speaker, that you will bear the circumstances in mind when you seek to allocate time for this purpose.

The Speaker: I am obliged to the hon. Member. I would add that I waited as long as I dared, because I know the hon. Gentleman is not usually silent.

Orders of the Day — FINANCE BILL

(Clauses 5, 6, 7, 9, 10, 11, 13, 14 and 19, and new Clauses relating to the matters referred to in the Order of the House [9th May].)

Considered in Committee. [Progress, 16th May.]

[Mr. GEORGE THOMAS in the Chair]

Clause 7

CHARGE OF CORPORATION TAX FOR FINANCIAL YEAR 1973.

4.17 p.m.

Mr. Maurice Macmillan: 1 beg to move Amendment No. 19, in page 6, line 17, to leave out '52' and insert '50'.
The right hon. Gentleman the Chancellor of the Exchequer said not long ago that no one now believes that profits is a dirty word. He added that the Government would keep a close watch on how profits are going, in order to see that investment was not endangered. In the same speech, he indicated that he would give a boost to demand if the economy looked like becoming too depressed. Previously the Chancellor had expressed a similar concern and had given similar indications about company liquidity.
The purpose of this amendment is to seek from the Government, through whoever is to reply to this debate, a more detailed exposition of the Government's views on future trends and to try to get from them a clearer indication of the kind of policies they mean to develop to meet these trends and to deal with the kind of difficulties that the Chancellor himself, in speaking at the CBI annual dinner, showed that he felt might at least be possible.
My hon. and right hon. Friends and myself will argue that both the profit situation of companies and their liquidity problems are already very great and are already large enough to constitute a medium and long-term threat to the possibilities of investment, capital formation and stock building. I shall seek to ensure, and we shall try in our arguments to ensure, that the Chancellor not only practises what he preached to the CBI but

also does so in time for his action to be effective.
This is, therefore, a probing amendment to enable the Committee to explore these important matters. I shall not be advising my hon. and right hon. Friends to divide the Committee. For two percentage points over stocks expected seems less of a threat to profitability than many other factors to which I shall come in the course of this discussion and later. It is less of a threat to liquidity than the provisions of Clause 10 on which we shall be seeking to press our amendments to a Division unless we can get satisfactory assurances from the Government. But the Committee should have an opportunity for a general debate on these vital matters in full before we rise for the Whitsun Recess.
Before I come to the main point of my argument I have two points to make, one a general point and one concerning a matter of detail. I take the matter of detail early in my speech to give the Minister time to consider it and to answer it if he can. I accept that he may not be able to do so in answering the debate since it could be a matter which we would wish to raise either in Committee upstairs, if that is in order, or, later, on Report.
The matter concerns preference dividends. It has been suggested to me that these should not be grossed up at the current rate of advanced corporation tax but taken at the original fixed amount. I raise the question at this moment rather than on Clause 10 because, according to my information, the increase in the corporation tax rate and the increase in advance corporation tax itself result, because of Schedule 23(18) of the Finance Act 1972, in a curious situation. If I am right the taxable income of preference shareholders is greater than the actual income which is stipulated in the terms in which the preference shares have been issued. This is a matter of detail. I have raised it early in order to give time for it to be worked on.
My more general point is to warn the Committee of the dangers of what might be called the marginal argument. That type of argument has ruined more gamblers and heavy spenders, and done more damage, than almost any other when it is applied to money. I said that I thought that an increase of only two percentage points on the basic rate of


corporation tax was perhaps less of a threat to profitability than many other factors. But it is just that sort of argument— although I make it myself—that I must warn the Committee is so dangerous. It is a favourite argument of Treasury Ministers who are advocating increases in revenue. It is also a favourite argument of spending Departments when they are advocating increases in Government expenditure, which, happily, are resisted by Chief Secretaries of the Treasury.
It is this argument that leads the gambler to put on yet another bet to get back what he has lost; this argument leads people to spend a little more than they can afford because that little bit extra will make no difference. It is the argument of the Victorian maidservant who was dismissed for having a bastard child and who told her mistress "It may be a bastard, but it is only a little one". It is the argument that my right hon. and hon. Friends and I will not permit the Government to keep getting away with— and I make the point with this degree of vehemence because we are allowing them to get away with it this time.
In view of many considerations I think I should declare a personal interest. I am the chairman of a company which is affected by the rate of corporation tax. The profits from my family business, like other companies' profits, will be reduced. We shall have greater problems of financing an increasing turnover, especially since some of the increase in that turnover is purely inflationary. We shall have greater problems in investing for the future.
My main point today concerns the profits and liquidity of companies and the consequences for the future of stock-building and investment. In our earlier debates on the Budget the Chancellor referred to a significant increase in the share of the national income going to companies. I think that he was factually wrong about that, whether he was taking account of stock appreciation and capital consumption or not. The Financial Secretary admitted in reply to a Parliamentary Question that if stock appreciation and capital consumption were excluded from profits the figures looked very different. Stock appreciation is an element in profit which is not available either for distribution to shareholders or for reinvestment in the business itself. Capital

consumption is too often in these days of high inflation simply the provision of extra working capital required to finance a turnover which may be static in real terms although increasing in money terms.
Excluding these two factors, the trading profits of companies expressed as a percentage of the national income were in 1964, 13 per cent.; in 1972, 7-1 per cent.; and in 1973, 6-8 per cent. That is hardly a significant increase in the share of the national income.
In giving the figures I must express my indebtedness to Lloyds Bank Review for April 1974. Taking the longer-term pre-tax situation, both the share of profits in the national income and the rates of return on capital have been steadily declining since the early 1950's. In the situation after tax, the share of profits in the national income has been declining since at least the mid 1960's, and the share and rates of return on capital have been declining from the early 1960's. In the article I am quoting the gross trading profit expressed as a percentage of national income was 12-6 per cent, in 1950; in 1951 it was 14 per cent.; in 1952 14-1 per cent. But in 1970 it was 67 per cent.; in 1971 6-6 per cent. and in 1972 6-7 per cent. For those last three years, if investment grants are included, the figures were 8 per cent., 7-8 per cent, and 7-4 per cent.
Without investment grants, therefore, 1970, 1971 and 1972 were significantly worse than the equivalent period in the 1950's, and even with investment grants profits were considerably lower. This may be evidence of some neglect by all Governments of the need to maintain company profitability. However, it makes a nonsense of the Labour Party's arguments and attacks, which still persist, that the company sector is getting far too much of the national cake. It makes great sense of the Chancellor's new view that profits is not a dirty word and that profits must be protected to ensure that investment is not endangered.
What, after all, is the function of profits? It is partly for them to be distributed to shareholders—and these are not simply individuals, the few or many who happen to own shares in companies. They are, in fact, the great mass of people who hold an indirect interest in the profitability of companies through pension funds, life assurance policies and


unit and investment trusts; and I think I am right in saying that about 26 per cent, of the shares in quoted companies are held in pension funds.
So there is a wide interest from the point of view of distribution in the profitability of companies. It is an interest which goes far beyond that of the large individual shareholder or even the small direct shareholder and there are many people whose savings and pensions are dependent on profits distributed through the institutions.
4.30 p.m.
The second function of profits—and this is perhaps even more important—is that they should be used and be available for investment and stockbuilding for the future, and it is that which is worrying us on this side of the Committee.
The third function is to provide the funds required by the Government in tax, and it is not enough to refrain from killing the goose that lays the golden eggs. It is also necessary not to starve the goose, or the eggs that it lays will be small and short of nourishment.
The new charges on companies by way of corporation tax as set out in the Budget Speech and the Finance Bill will be a heavy burden. It is estimated that the corporation tax changes will amount in total to about£420 million extra on companies in the tax year 1974-75. while the employers' share of the National Health Service contribution will be about£348 million.

The Paymaster-General (Mr. Edmund Dell): Can the right hon. Gentleman expand on the figures that he is using? With what is he comparing the figure of£420 million extra?
Mr. Macmillan: These are the total burdens of the addition over the 50 per cent, and the extra by way of advance corporation tax—not extra on the rate alone.
Companies will be faced with the effect of increases in nationalised industry prices both directly and indirectly through the effect on the resale price index, and it has been estimated that the cost to companies of triggering off the threshold agreements could be anything between£100 million and£200 million.

There is a heavy burden that will have its effect on both profits and cash flow, and perhaps I may quote here from the Financial Times Monthly Survey of Business Opinion, published on 6th May. It says:
The median forecast increase for unit costs now exceeds 10 per cent, and for total unit costs over 12 per cent, virtually double the level of a year ago. Because of price controls, output prices are expected to rise less rapidly which will mean a further squeeze on profit margins.
Dealing with investment, the same survey speaks of expansion plans being shelved with a
smaller rate of increase than was being predicted last summer.
The Chancellor said he was delighted that the CBI's survey shows firms expecting a significant rise in employment over the next few months, but the Financial Times survey goes on to say:
For manpower, the tendency seems to be to step up work forces in the short run to clear off the backlog of orders and then to cut back if demand turns down. On orders and output, the outlook is of 'lower expectations all round'.
That is reinforced by the CBI Industrial Trends Survey for April which the Chancellor quoted, but he did not quote that passage which said that
never before in the history of the survey have fixed capital investment prospects collapsed so rapidly and, on this evidence, the outlook on investment from the turn of the year has become quite gloomy…there are twice as many references to financial contraints to investment now compared with six months ago.
I turn from profits to the problems of liquidity. The Government estimated that company liquidity at the end of 1973 was about£10,000 million, but that did not take account of bank advances totalling about£14,000 million, which meant that there was a negative liquidity of£4,000 million. That is due partly to the factors which I have mentioned. These also affect the reduction which we can see coming of£1,000 million to£1,200 million in company liquidity which will be affected, too, by other factors in the tax year 1974-75. There will be the higher rate of corporation tax and accelerated and larger payments of advance corporation tax. The offsets built up in July and October 1973 and January and March 1974 will reduce the 1975 corporation tax payment in January, but this reduction will be outweighed by the extra advance corporation tax payment.
One can assess the market shortages caused by corporation tax payments— and here I include the whole range of increases brought in by the Government —for the next year, 1974-75, as totalling about£3,000 million. What is perhaps even more significant is that the same calculations show that there is a minor peak in July 1974 of£300 million and a larger peak in October 1974 of£350 million, but in January 1975 the market shortages caused by corporation tax demand may reach£750 million, and in February of that year the figure may be£500 million.
There is another significant factor in considering company liquidity in relation to the rate and impact of corporation tax. The figure of£350 million in October 1974 compares with between£50 million and£100 million in 1972-73. The figures in January and February 1975 of£750 million and£500 million compare with between£400 million and£450 million in 1972-73. On the other hand, where the impact is less at any given time—for example, in August and September of this year—one finds that the 1974-75 figure is£100 million compared with£50 million in 1972-73.
The changes mean that the impact of corporation tax as a whole is greatest at the peak periods. The effect of the changes is greatest at the time when the normal payments of corporation lax tend to be highest anyway. This represents a threat to the liquidity of companies in July and October of this year, and even more so in the early part of next year.
The Chancellor of the Exchequer has perhaps made too little of this—or perhaps from his point of view he has not. It is noticeable that this year's forecast is not taken into the first quarter of 1975, but my argument has been the practice in the past, as is borne out by the Government's own estimates. They are using the Budget to transfer the borrowing requirement from the public to the private sector. If we take the public sector component from the Financial Statement and also assume—as one is entitled to assume, unless the Government make such a mess of it that the forecasts go all wrong—that the non-oil deficit is eliminated during 1974-75, then the public sector and the overseas sector together show about£1,300 million financial surplus, which must mean a substantial financial deficit

in the corporate sector for industrial and commercial companies.
If I am right, and if the figures which show the improvement in the financial situation of the public and overseas sectors do, as I believe they must also show a substantial deficit in the corporate sector, then companies, in order to restore that deficit, can only reduce capital formation and stockbuilding. The effect of this will not be seen at once. Judging by the experience of past cycles, there is a time lag of about one and half years in stockbuilding and of nearly two years in capital formation.
I hope that we shall hear not only about the present effect of corporate taxation on company liquidity and profitability and the resulting effects on stockbuilding and investment but also about the effect in the longer term of the present tax situation. The Chancellor has undertaken to watch the situation carefully and in doing so he has shown some kind of awareness of the problems that he could be facing towards the end of the year. But his Budget and the changes that he has made in company taxation must adversely affect the profitability of industry over a period and must damage the capacity of the nation to maintain a standard of living comparable with that of other developed countries because of its effect on stock building and investment.
If he is creating a situation in which industrial and commercial companies are forced into financial deficit so that their economic activity declines, he must end by increasing the public sector deficit and borrowing requirement either because of the loss of revenue from tax receipts or because he has to subsidise companies which are in difficulty.
As we have said, the Chancellor is recklessly spending the taxpayer's money on benefits that time will show to be illusory. I hope that the Paymaster-General will be able to show that this is not an exercise to buy temporary approval with the electorate's own money, that he will show it by replying to the questions which will be raised in this debate and that he will give the Committee some indication of what he thinks are the prospects in the corporate sector for industrial and commercial companies in January 1975. It is on the general confidence now about what is likely to happen then that our ability


as a country depends, both in dealing with our present difficulties and in creating future prosperity.

4.45 p.m.

Mr. Dick Taverne: One would not have guessed from the atmosphere in the Committee that we were debating the country's economic future. When this debate began I counted nine Conservative Members present. Since then, no doubt attracted by the electric delivery of the right hon. Member for Farnham (Mr. Macmillan), these numbers have increased. There are now about a dozen. During these debates from this side there are occasional worthwhile contributions from the hon. Member for Loughborough (Mr. Cronin) and occasionally some learned contributions from the hon. Member for Gateshead, West (Mr. Horam); and that is the substance of the debate.

Mr. John Peyton: While the hon. and learned Gentleman is calling the roll of Members of this party—something which no one invited him to do— perhaps he would like to mention the numbers of his erstwhile colleagues who are present.

Mr. Taverne: I have just been referring to my erstwhile colleagues. I said that there were at least two of them——

Mr. Peyton: The numbers.

Mr. Taverne: There are several of them present—about four. I was referring to those who took a dynamic part in the debates and said that they amounted to half that number—namely, two—apart, of course, from the Paymaster-General, for whom I have the greatest respect.
We have debated in the past whether the Finance Bill should be considered in Committee upstairs, and I believe that there is something to be said for taking the whole lot upstairs, considering the amount of interest that is shown here. The only snag is that proceedings in Standing Committee can go on until inordinately late hours, sometimes until early in the morning.
I remember one Finance Bill debate in Standing Committee in which I, as Minister of State, and the right hon. Member for Manchester, Central (Mr. Lever), then Financial Secretary, took part. At four o'clock in the morning, the hon. Member for Wycombe (Sir J. Hall)

asked whether he could be told which of the two Ministers would be answering the debate so that he could be woken up. It was the right hon. Member for Manchester, Central who was responsible, and he answered the hon. Gentleman, quick as a flash—that was a tribute to him at that hour of the morning—that he was no more justified in inferring from the fact that our eyes were closed that we were asleep than anyone would be in inferring from the fact that the hon. Member for Wycombe's eyes were open that he was awake. This is the kind of atmosphere in which our great economic affairs are debated.
The words of wisdom spoken on this procedure were those of the Select Committee on Procedure, which some time ago recommended a Standing Committee on taxation. There are a large number of questions which are just not answered but should be answered. We are today discussing corporation tax—not a minor item, but something which in a full year would increase taxation by about£130 million. One would not have guessed from the attendance so far that this was a major item.
We do not know what the effect of this increase in corporation tax will be. Some people suggest that corporation tax is a splendid thing to increase if taxation has to be increased at all because it is a tax on dividends and may be paid out of capital. It is certainly assumed in the Treasury that an increase in corporation tax does not have a great effect on consumption. I cannot remember the exact proportion which the Treasury allows in its allocation of the effect on consumption, but it is not very large—about 20 to 30 per cent.
It has always been assumed, therefore, that increasing corporation tax helps towards redistribution of income. But this does not necessarily follow. There is very little information about the effect of an increase in corporation tax. One or two studies in the past which have suggested that it was a tax on capital bear out what the Treasury has been assuming, but some interesting evidence was given to the Richardson Committee on VAT, I think in 1963, when Professor Kaldor, who is not a million miles away from the present Government, advocated that we should substitute VAT for corporation tax because the latter in prac-


tice had a direct effect on prices and was very regressive and if one substituted VAT one benefited manufacturing industry because the burden of taxation was redistributed towards services. The burden of the argument was that corporation tax, if it were increased, directly affected prices, in which case it is anything but redistributive.
Many of us—I do not know how many —are awaiting the results of a profound study being undertaken by the Department of Applied Economics at Cambridge by Wynne Godley and Professor Nondhaus about the effects of corporation tax on prices. That is an incidental part of the study. I should not be surprised if the result shows that corporation tax is passed on to prices. An interesting article appeared in The Guardian on 14th November, written by a bright young economist from Cambridge, Mr. Mervyn King, about the general picture of profits. He rather disputed the general allegation that profits have steadily declined. He says that, while profits before tax have declined, profits after tax have not. Why? Because the burden of corporation tax has dropped.
Mr. Mervyn King wrote:
Comparing profits after tax with total labour costs we find that the profit share has been remarkably stable. Expressed as a moving average to smooth out cyclical fluctuations, the share of profits after tax never once deviates from a range between 25 per cent, and 27 per cent., and if we exclude 1965, when profits were high because of an unusually low tax bill due to the transition provisions for the changeover to corporation tax, the range is even narrower with profit sharing lying between 25 per cent, and just over 26 per cent, in every year.
Mr. Mervyn King says that the reason for that is that, because of the decline in the burden of corporation tax, there has been no real decline in after-tax profits.

Sir John Hall (Wycombe): I do not dispute the figures given by the hon. and learned Gentleman, although they do not apply to the current situation with the increase in corporation tax. Do the figures show that profits did not decline in real terms or in money terms?

Mr. Taverne: They suggest that the picture if one quotes pre-tax figures is nothing like as bad as if one quotes after-tax figures.

Mr. Dell: It is the other way round.

Mr. Taveme: I will put it simply—that the post-tax figures are better than the pre-tax figures. I am not concerned about the real effect. I am concerned about the implication of the effect of corporation tax. The suggestion is that corporation tax has a much bigger effect on prices than is generally assumed, and that perhaps the Treasury is wrong in always assuming that corporation tax does not have the effect on consumption and prices that it has.
I will not build a great deal on the articles of Professor Kaldor in 1963 and Mr. Mervyn King in 1973, except to suggest that perhaps we do not know a great deal about the effect of corporation tax. We should know more about it before we start to make confident assertions, as perhaps the Paymaster-General will—although I know him too well to think that he will dogmatically assert anything for which he has no evidence— about the effect of the taxes, and before we start to assume, as Government supporters may, that corporation tax can be increased without great harm to the cost of living.
I am doubtful whether the increase in corporation tax is such an attractive source of income as it has sometimes seemed, as merely affecting the overall balance of public sector and private sector spending. This matter should be explored more fully by a permanent committee on taxation rather than in a desultory debate in Committee. This is not a matter which the Opposition—probably rightly—will force to a Division. It is a matter which is clouded in uncertainty. Let us not be too dogmatic about the effect this rise in corporation tax has or does not have on the cost of living or on the nation's economy.

Mr. David Price (Eastleigh): I wish to support the amendment. It is a serious mistake for the Chancellor to raise corporation tax this year. The right hon. Gentleman the Paymaster-General knows me well enough to know that I have no ideological objection to increasing corporation tax under the appropriate conditions. Following the remarks of the hon. and learned Member for Lincoln (Mr. Taverne) and my right hon. Friend the Member for Farnham (Mr. Mac-millan), I suggest that there are several powerful reasons why it is wrong this year to increase corporate taxation.
Before I do so, I should, in the spirit of tomorrow's debate, declare my continuing interest and personal involvement in the health of British industry as well as that of many of my constituents. I am as much an industrial animal as I am a political animal. During my working life I have done various things which it would be tedious for me to relate in detail to the Committee. I hope that I have your permission, Mr. Thomas, not to go through my apologia pro vita sua, although detailed reading of Motion No. 9 on tomorrow's Order Paper would suggest that I have to start with my apprenticeship.
Currently, I am involved with the Institution of Works Managers. I come from industrial management, and I am proud to feel that I still have a working connection with that body. I am also a non-executive director of a wholesale meat company, which is no different from being a non-executive director in any other company. Coming to my expectations for the future, it would be unduly conceited of me to have any expectations at all. I mention that because it is relevant to what we shall discuss tomorrow.
The Chancellor has three main reasons for increasing corporation tax this year. The amendment is designed to leave corporation tax as it is. The three reasons adduced or implicit in the Chancellor's decision to raise corporation, tax are misguided in this current year.
Because of the Government's commitment to major increases in Government expenditure, the Chancellor is landed with a consequential commitment to increase taxation to achieve his judgment of a broadly neutral Budget. I do not disagree with the Chancellor on his broad Budget judgment of neutrality this year, particularly as he has taken the reserve position of having a second look at things in the autumn. But I am entitled to say to the Paymaster-General that, agreeing with his right hon. Friend's broad Budget position, I would not have increased Government expenditure to the degree that the Chancellor has and, therefore, if I were sitting on the Treasury Bench I would not find myself in the right hon. Gentleman's position of having to find extra taxation to achieve this broadly neutral position.

Therefore I start with this basically different point of departure from the right hon. Gentleman and his hon. Friends.
Secondly, following the Chancellor's self-enforced need to raise taxes, his eye has settled upon British industry as being a politically suitable victim. The Chancellor has followed the traditional advice offered by that great French statesman, Colbert:
The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.
As the leaders of British industry are collectively political eunuchs and of no electoral consequence, the Chancellor has felt that he would safely ignore them. I listen hopefully for their hissing, but I do not find it coming very strongly from the leaders of British industry.
5.0 p.m.
I suggest that the Government make a mistake in thinking that the so-called captains of British industry represent the whole of industry. There are also the shareholders who, as my right hon. Friend the Member for Farnham reminded us, are the legal owners of British industry.
Let me take the point a little further and remind the Committee that shareholding in British industry is not confined to the wealthier classes. There is a vast and growing army of people whose savings are invested in industry through pension funds, life assurance policies, unit trusts and investment trusts. Although they are not direct equity shareholders, it must be emphasised that they are shareholders through the prudential institutions. In purely personal terms they have a pecuniary interest in the health of British industry and any Government will ignore that factor at their peril.
The Chancellor's view that British industry has a broad back has been taken up repeatedly in these debates. The Chancellor in his Budget statement said:
Companies have in general been doing rather better in the last year or two and profits last year reached a very high level. There was, in fact, a significant increase in the share of total national income going to companies. In these circumstances, it is only right that companies should bear their share of the cost of putting the economy back on course." — [OFFICIAL REPORT, 26th March 1974; Vol. 871, c. 319.] 
On paper figures the Chancellor is correct, but if we allow for inflation the picture


is very different. Speaking from the Opposition back benches, I believe that the whole of our challenge to this Finance Bill is in terms of inflation.
The question we must ask is: do the Government proposals make sense in terms of the health of our economy in a highly inflationary situation? I do not blame the Government for inflation and, although we can make marginal criticisms, I think all will agree that we are in a situation where incipient inflation is growing into hyper-inflation. I do not want to detain the Committee by quoting the inflationary experiences of other countries throughout the world, but suffice it to say that all major industrial countries are facing vastly higher rates of inflation in the current year than was the case in the previous three or four years. Therefore, we can genuinely talk about the risk of hyperinflation.
In these circumstances, is it right for the Government to increase the taxation burdens on British industry in such an inflationary situation? The Paymaster-General may argue that companies benefit from fiscal drag and are always a stage ahead of inflation. However, I suggest that this is not the case, for two reasons. First, there is the competitive situation. There does not need to be a perfect competitive situation for us to say that we have for many of our products a competitive market. This restrains the degree to which any company can increase its profits through its prices to take care of inflation.
The second factor is the existence of the Price Commission. I believe that there is greater restraint on the degree to which any company can pass on the effects of inflation than is generally recognised. If we did not have a competitive situation or price control, there might be a case for increasing corporation tax this year, because the Chancellor would cream off the company equivalent of fiscal drag. The mere fact of inflation ensures that existing tax rates will increase the revenue going to the Treasury. Companies are not similarly placed.
There is the further point to be considered—and this point is not always fully accepted—that inflation must be examined in terms not simply of interest rates but of compound interest

rates. A rate of inflation amounting to 10 per cent, a year means a doubling of the cost of living in 7-3 years and—even more frightening—in 11| years the figure is trebled. Currently we are suffering an inflation of about 15 per cent, a year. In compound interest terms this means a doubling of the cost of living in less than five years.
Let us think of that concept in respect of the replacement of an asset. Much of industry is not run on a shoe string or on a year-to-year basis, but operates on a five, 10 or even 15 year basis. If an industry is dealing with ships, chemical plant, oil refineries it does not begin to see a return in the short term; the return is over a very long term. We must have a system of corporate taxation which makes it possible in real terms to replace capital assets.
The Paymaster-General and I could agree that neither corporate accounting under the Companies Act nor our taxation system is adequate to deal with the real situation presented by the present rate of inflation. I am in favour of the proper taxation of real profits, but I question whether we are taxing real profits and whether in fact we are not taxing purely paper profits. This concept goes wider than the amendment and the question of reducing the rate from 52 per cent, to 50 per cent. But I am saying that until the present Government, or another Government, get down to these matters with industry—and this may mean amendment of the Companies Act—we shall be taking a grave risk if this year we raise taxation on companies. This is the concept we oppose.
I should like to sum up the situation by quoting a question once posed of Mark Twain: "What is the difference between a taxidermist and a tax collector?" Mark Twain replied, "The taxidermist takes only your skin." I suggest that the Chancellor of the Exchequer has made a good start in gutting as well as skinning British industry—and that is against the interest of my constituents.

Mr. John Cronin: The hon. Member for Eastleigh (Mr. Price) and the right hon. Member for Farnham (Mr. Macmillan) made persuasive speeches. The latter produced a mass of figures which could mean almost anything. From the common


sense point of view, it is obvious that the country is facing a severe economic crisis and it is reasonable that industry should have to carry on additional burden. Industry this year is expecting a corporation tax of 50 per cent. To increase it by a further 2 per cent, is a marginal increase in view of the terrible economic mess in which the Tories left this country. I suggest that there is no case for accepting this amendment.
We must agree that, by and large, the Chancellor's Budget judgment has been very satisfactory as far as one can see into the future, and I will not quarrel with that. But having said something complimentary to my right hon. Friend, I should like to sound a note of warning. It is that I should not like this or any other Government to regard company profitis as an inexhaustible source of revenue.
It has become fashionable in this Committee to declare an interest. The right hon. Member for Farnham declared one. The hon. Member for Eastleigh declared one. My own is a very tenuous one. I am a non-executive director of a company. It gets one morning a week of my time. I have a very modest remuneration and even smaller share in the company.
It will not be in the national interest if there is any further substantial increase in corporation tax. Company profits are either distributed or, in the main, kept for investment in stocks, in new buildings and in plant. Profits which are distributed are subject to a very effective form of progressive taxation. We need not concern ourselves with that. But the part of the profit which is retained has to be used for investment, and obviously the future economy of the country depends very much on how much money is available for investment.
It is essential that companies should have adequate funds for investment and for expansion. If the Chancellor of the Exchequer uses corporation tax more extensively than it is used at present, there will be liquidity crises in many companies.
The Chancellor of the Exchequer is subject to many influences. He has always the problem of raising revenue. Most of the electorate are indifferent to how much corporation tax is charged. They are concerned only with their per-

sonal taxation. The Chancellor of the Exchequer also has to placate the trade unions. He has to indicate to them that the social contract is being carried out and that their members are not having to bear an unfair burden of taxation.
The Chancellor of the Exchequer also has to look over his shoulder, to an extent, to some hon. Members who feel that it would be best if most industry were under public control. That may or may not be desirable; it depends on one's political point of view. But I think that most hon. Members agree that inefficient private industry is not a good substitute for the public control of industry. For that reason, it is very important for the Government to ensure that the private sector has adequate funds for investment and for expansion and has no risk of a liquidity crisis.
Whether we like it or not, about two-thirds of industry is in the private sector. The Chancellor of the Exchequer has to co-operate with that private sector industry if we are to achieve satisfactory expansion and emerge from our present unattractive economic situation. This involves co-operation with managing directors, chairmen and the large industrialists whom one hon. Member called "political eunuchs". I do not think that that is the case. Many of them are rather bigoted Conservatives. Nevertheless, it is essential for the Chancellor of the Exchequer to co-operate with them, otherwise we are in very serious trouble.
Last Tuesday, the Chancellor of the Exchequer dined with the Confederation of British Industry and said:
I can assure you that the Government has no intention of destroying the private sector or encouraging its decay.
It is unfortunate that it should have been necessary to say that. But what my right hon. Friend was saying in so many words was, "I have no intention of cutting the country's economic throat, because we are dependent on the private sector." There is no escaping that as matters are at present.
Industry is carrying some quite severe burdens at present. Some of those burdens have been brought about by the policies of the previous administration, especially the massive increase in inflation, now running at about 18 per cent, a year, the ill-judged and ill-timed attempts at


expansion last year and the year before, the three-day week, and the nationalised industries' price increases. These are all very heavy burdens on industry, and additional burdens are price control, short-time working and the shortage of components. I suggest that industry is at present carrying some quite severe burdens and therefore that it is desirable that the additional burden of unduly decreased liquidity should not be thrust upon it.
5.15 p.m.
British industry is in harsh competition with firms overseas to obtain a fair share of the export markets. That will not be obtained successfully if British firms are experiencing liquidity difficulties vis-a-vis foreign firms. I suggest that, although the present rate of corporation tax is probably just and reasonable in the circumstances and would not have any undesirable effect on the economy, my right hon. Friend the Paymaster General should bear in mind that it is not desirable that company profits should always be the place from which increased taxation should be raised.
Company liquidity is all important in expanding industry. It is important to jobs. It is important to our standard of life. So it is very important that the private sector of industry should be assured beyond all doubt that it is having the full co-operation of the Government and is not likely to have to expect a further large increase in corporation tax.

Mr. Peyton: I was fascinated just now to hear the hon. Member for Loughborough (Mr. Cronin) attribute some of our misfortunes to what he described as the previous administration's ill-timed attempts at expansion. It is a classic case of being wise after the event—unless the hon. Gentleman is on the record as expressing different views from those which were held by a large part of industry, the entire trade union movement and, so far as I know, every right hon. and hon. Member on both sides of the Committee except some who were very gloomy——

Mr. Cronin: I should have thought that it was obvious to a large number of people, including myself, that a general expansion of the kind attempted by the right hon. Gentleman's party would inevitably cause balance of payments difficulties and that the only satisfactory form of expansion was an export-led

expansion, which is what we are entering into now.

Mr. Peyton: I accept all that. I merely comment on the fact that the previous administration's policy of expansion, growth and the rest of it, however ill or well judged, had the overwhelming support of all right hon. and hon. Members and that, so far as I know, the hon. Gentleman did not then say, "Let us be careful. Let us restrict this expansion."

Mr. Cronin: Mr. Cronin indicated assent.

Mr. Peyton: I am obliged to the hon. Gentleman for his admission, because I was about to ask to have my attention called to some remark on the record to the contrary.
My hon. Friend the Member for East-leigh (Mr. Price) described himself as at least as much an industrial animal as a political animal. I have some claim to being a political animal. That apart, the only other adjective that I would adopt at the moment is "gloomy". I am a very gloomy and an exceedingly depressed animal when I view our future prospects.
I had no intention of taking part in this debate until I heard the very interesting speech of the hon. and learned Member for Lincoln (Mr. Taverne). He speaks as a member of that small band of people who have once worked and served inside the extraordinary institution of the Treasury and come out alive— though how much one can add to that "unscathed", I am never quite certain.
The hon. and learned Gentleman made a bold speech, from time to time casting his eye—I hope it is not improper to say that—to the left beyond his right hon. Friend the Paymaster-General as if looking for confirmation from others that he was on reasonably firm and not too dangerous ground. He advocated a suggestion that has been made before—the setting up of a permanent committee on tax. He stated that one reason was that many important questions on tax had not been answered. Judging by results, almost any system other than our present one is to be preferred. The shortcomings in our procedures for discussing tax and fiscal matters are so obvious that we would be hard put to it to resist any sensible suggestion. I accept the hon. and learned Gentleman's suggestion as a preferred alternative.
The hon. and learned Gentleman, in a moment of great boldness, questioned how far Treasury assumptions are borne out. I should like to ask with great depression and gloom, how far have Treasury assumptions ever been right? How far have any of the forecasts made by successive Governments since the war been borne out and, if they have been wrong, why? We must face that fact very clearly.

Mr. Taveme: Does the right hon. Gentleman recognise that, unfortunately, it is part of the science of economics to be better at telling people tomorrow why what one predicted yesterday did not come true today?

Mr, Peyton: That is a splendid question. If I may have a look at it in writing afterwards, I will willingly give the hon. and learned Gentleman an answer.
Sir J. Hall: Perhaps I can help my right hon. Friend. I think that the hon. and learned Member for Lincoln was saying that if all economists were laid on the ground they would stretch in all directions.
Mr. Peyton: I wish that I could do that. It would cause me no distress to see some of these sages on a rack which might cause them to express some note of regret, or even apology, for the many occasions on which they have been wrong.
The hon. and learned Member for Lincoln warned us against the dangers of being dogmatic about the effects of raising corporation tax. I support what was said by my right hon. Friend the Member for Farnham (Mr. Macmillan) in an interesting, pungent and well-argued speech on this subject. Socialist Governments are always so confident of the fact that they are planners—at least, planners by intention—but in practice they are guided more often by the wastrel's maxim, "Let tomorrow look after itself."
I welcome this short debate, because it gives the Paymaster-General an opportunity to stand at the Dispatch Box and, tempted as he may be to pick up debating points or mistakes that have been made, to tell us what he, his Department and the Government think are the likely prospects for investment in British industry.
Attempts that have been made to stimulate investment in British industry since the war have not been all that successful.

I cannot resist the temptation yet again to refer to the fact that where investment is most closely controlled and influenced by the Government the effect is baleful. I refer, of course, to the nationalised industries.
Recently, Mr. Richard Marsh attacked the policies of successive Governments on railway investment. I found myself in entire agreement with everything that he said, though it might have been fair and friendly—[Interruption.] Before the hon. Member for Gateshead, West (Mr. Horam) laughs again, perhaps he will allow me to finish the sentence. It might have been fair and friendly if he had gone on to say that I had produced some proposals which, if any Government cared to adopt and pass them through the House, would make a far better blueprint for railway investment than anything we have yet had.
I go back to my original question: what does the right hon. Gentleman think are the prospects for securing anything like adequate investment in British industry? How are those prospects affected by this increase in corporation tax which, unlike the hon. Member for Loughborough, I deplore.

[Sir MYER GALPERN in the Chair]

Mr. Dell: My hon. and learned Friend the Member for Lincoln (Mr. Taverne) said that on this amendment we were discussing the economic future of the country. I should point out that we are debating whether corporation tax should go up from 50 per cent, to 52 per cent. My hon. and learned Friend evidently thought that this would be a wide-ranging debate. I thought that it would be a narrow debate on this limited question whether the rate of corporation tax should go up from 50 per cent, to 52 per cent.
Admittedly it is an increase of 2 per cent. It compares with an increase of 3 per cent, in income tax. I should not have thought that it was the kind of increase that would bring howls from British industry, some of which we have heard, in reaction to the Government's measures.
My hon. and learned Friend said that we did not know the full effect of corporation tax and that there was a need to study its effect very carefully, particularly on prices. I agree that we need to


study the effect of corporation tax increases on the British economy and on industry.
We are discussing a limited step to be taken by my right hon. Friend the Chancellor of the Exchequer in a serious economic situation. It should be regarded as a limited step. Admittedly, it is an increase, but it is not the kind of increase that can be argued as having damaging implications for British industry.
The right hon. Member for Yeovil (Mr. Peyton) wanted to know what estimate we have made of the prospects for investment during the coming year. Estimates are included in the Financial Statement and Budget Report. I am sure that the right hon. Gentleman will have studied them very carefully.

Mr. Peyton: I did not ask what the right hon. Gentleman inferred. I asked what estimate the Government had made of investment prospects for British industry. In case it is news to a Treasury Minister, by "prospects" I mean something well in excess of one year.

Mr. Dell: I shall discuss later the likely effect, as I see it, of the increase in corporation tax on British investment and the prospects for British industry.
The right hon. Gentleman admitted, or stated—I will not use the word "admitted"—that measures taken by successive Governments since the war have not had the effect of raising the level of investment by British industry in the way that many of us would have wished in order to raise the growth rate of our economy.
5.30 p.m.
I shall certainly not suggest that the effect of this increase in corporation tax will have either the negative effect which Conservative hon. Members suggest or, indeed, any positive effect in itself. Very much wider influences have to be brought to bear on British industry before we have any hope of achieving an increase in manufacturing investment such as our economy requires. I merely point out that there happens to be an estimate in respect of this year in the Financial Statement and Budget Report.
The right hon. Gentleman should not blame us too much for being planners by intention. After all, the previous Government were planners by U-turn. They also

found that it was necessary in making decisions about the British economy to use foresight, limited though it is in these matters. No one claims to be able to make forecasts on these matters with a very high degree of reliability, but how one manages the economy without attempting to assess the likely effects of one's actions, I do not know.
Behind this debate there has been an attempt to discuss the present Government's attitude to the private sector of British industry. Indeed, that is, apparently, the only reason for tabling the amendment. The Opposition will not vote upon the amendment. I think that in their hearts they know that an increase from 50 per cent, to 52 per cent, cannot have the exaggerated effects which in their speeches they have tended to prophesy. What they want to discuss or, in some cases, to make unfortunate allegations about, is the present Government's attitude to the private sector of British industry.
There can be no possible doubt—and there cannot be any other possible attitude for a British Government—that in a mixed economy the success of that economy depends upon the success of the private sector of industry to a very large extent. The hon. Member for Easitleigh (Mr. Price) suggested that we thought that British industry was a politically suitable victim. But it is in our interests, as a Government, and as a country, that the private sector of industry should be successful. If we thought that this increase in corporation tax would have damaging effects, we would not make it.
My hon. Friend the Member for Loughborough (Mr. Cronin) warned us that we should not regard British industry as an inexhaustible source of revenue. I agree that we cannot do that. British industry has not merely to survive. It has, I hope, to flourish, and to flourish rather more successfully than it has in the past. But I emphasise that what we are discussing is an increase in corporation tax from what was expected to be 50 per cent, to a figure of 52 per cent.
What troubles me in the whole debate, in the House and outside, is the way in which British industry tends to react to measures honestly taken by the present Government in attempting to improve the economic situation of this country, and the language that is used—as though the


Government had a deliberate intent to damage British industry. This sort of language casts a more serious reflection on industry that it can possibly cast on the Government. British industry must realise, after all, that our record of industrial development since the war is not magnificent. I, for one, am perfectly prepared to accept that there is a very large degree of responsibility upon the British Government for that, because of stop-go policies which have, perhaps, exaggerated the cycle of our economic development. I do not deny that and have frequently stated it.
Nevertheless, it is not for industry to deny that it, too, hag some responsibility in this situation. Industry should be more reasonably looking at the merits and reasons for the policies which the Government are adopting, rather than using the sort of language which we have so frequently read recently in the Press and in statements by leaders of British industry. There are always too many excuses found in actions of Government for faults that would be better corrected by industry in attending to its own industrial development.

Mr. Cecil Parkinson: When the right hon. Gentleman talks about the attitude of British industry to his Government, bearing in mind the remarks of some of his colleagues about company profitability just before the General Election—the remarks, for instance, of the right hon. Member for Bristol, South-East (Mr. Benn), the Secretary of State for Industry—the deliberate imposition of the increase in ACT and this measure, does he think that a few honeyed words from the right hon. Member for Manchester, Central (Mr. Lever) and from himself should be more than enough to counterbalance the actions which have been proposed and promised?

Mr. Dell: I do not expect anyone to be at all influenced by my honeyed words. I notice that they are a great deal more influenced by the honeyed words of my right hon. Friend the Member for Manchester, Central (Mr. Lever).
What I am discussing are the actions of Government. I emphasise that we are discussing an increase in corporation tax from an expected 50 per cent, to 52 per cent. We shall be discussing later the

ACT supplement. But as an immediate response to the hon. Gentleman, I say that that supplement is merely an advance payment of corporation tax and that my information is that corporation tax, or tax on profits, is paid on average later in this country than it is in many foreign countries. Therefore, perhaps the complaints even on that score, which we shall discuss later, are less justified than the hon. Gentleman suggests.

Mr. Michael Alison: The Paymaster-General lays great stress on the modest factor of the extra 2 per cent, that he is raising by the increase from 50 per cent, to 52 per cent. But will he bear in mind that the 50 per cent, corporation tax in the last financial year produced£2,245 million, and in the current financial year is expected to yield£3,265 million? Will he, therefore, apply to himself the discipline of associating an extra£1,000 million yield when he talks about the extra 2 per cent.?

Mr. Dell: If the hon. Gentleman wants to know the figures of the financial effect of this increase from the expected 50 per cent, to 52 per cent., I remind him that they were given by his right hon. Friend the Member for Farnham (Mr. Macmillan). In a full year this represents£130 million additional payment. According to our estimate, in the current financial year it represents£65 million additional payment. That is against a corporation tax yield expected of about£3,200 million. This again emphasises the nature of the amendment. I repeat that to pin on this fact the sort of arguments which hon. Members have attempted to pin on it is unreasonable, to say the least.
The hon. Member for Eastleigh referred to the various burdens imposed by the Government in addition to this— corporation tax increase—the ACT supplement, nationalised industry price increases, national insurance, and price control. But the price code was arranged, in their wisdom, by Conservative hon. Members. There is the factor of allowable costs. These are allowable costs, and there are here allowable costs. The basic question that we have to decide is whether we have a prices policy. If we are to have such a policy there will have to be controls over the prices of manufacturing industry, and that policy


will have to be conducted sensibly. We shall have to take account of the effect of a prices policy on investment prospects —but a prices policy, after all, there has to be.
The hon. Member for Eastleigh also told us that what we were discussing was the problem of inflation, and the Budget in the context of that problem. There is a later amendment on the Order Paper, tabled by the Liberal Party, about the importance of inflation accounting. I think that there are new clauses on that subject. No doubt we shall come to that question in due course. The hon. Gentleman discussed companies' fiscal drag and suggested that under conditions of price control companies did not benefit from fiscal drag as much as, perhaps, they once did. I thought that that was his argument. But there is one aspect of fiscal drag from which companies do benefit—if that is what one wishes to call it—and that is the considerable delay that we have in the payment of corporation tax after the profits are earned. That is something which certainly goes to the benefit of industry.
The main point here, and I emphasise it in the context of the hon. Gentleman's remark, is that the Budget and the Finance Bill are not in themselves inflationary. There has been great discussion about the influences which the Budget is likely to have on investment. This has been the experience of successive Governments since the war. It is inevitable in the economy that we run that whereas Governments may to some extent be able to influence investment, the decisions about investment are made by the private sector in respect of the private sector. The question is, how can we influence investment decisions favourably?
The right hon. Member for Yeovil was discussing whether we should have had this great burst of growth last year, and he asked how many hon. Members were on the record as having been rather sceptical about the burst for growth and the going into deficit, with the unfortunate prospect that has so often occurred in the past when going into deficit—the necessity to bring the economy to too harsh a halt. If the right hon. Gentleman wants the names which were recorded on that subject, I give him my own name. A much more sensible strategy for the country's economy is, and always has been, a

steady sustainable rate of growth, rather than the attempt to speed up the rate of growth beyond the country's current capacity, which the last Government undertook—not, as they said, because they had thought it out and found it to be a reasonable course of action but because they were in a state of panic and saw the danger of there being 1 million people unemployed in the winter of 1971. It was in panic that the previous Government changed their course too fast and too hard and went into deficit. This is now a major part of the present situation——

Mr. Terence Higgins: It is very important that the right hon. Gentleman should not perpetuate that myth, because there is a danger that it will distort our judgment of the present situation. Clearly there has been a major change in oil prices and other short-run but important factors, but one misjudges the situation if one does not consider and analyse the position as it was when those events to which the right hon. Gentleman referred occurred. I suggest to the right hon. Gentleman that if he analyses the figures he will find that they will not bear out the view he has just expressed. If he thinks about it he will recognise that it is not in the interests of the country, or of the present Government, that that view should be expressed. No doubt we can discuss the matter on another occasion, perhaps during the debate on the regulator, but the point should be corrected at this stage.

Mr. Dell: The hon. Gentleman has now put on record the official Conservative interpretation of those events. I do not agree with that interpretation. I have thought about the matter and I think that my interpretation is much nearer the truth than that presented by the hon. Gentleman.

Mr. John Nott:: I apologise for the fact that I was not present earlier for the debate, but if this burst for growth was such a major failure of the previous Conservative administration, why were the circumstances such that the Chancellor of the Exchequer felt that a neutral Budget was required?

Mr. Dell: The hon. Gentleman surely knows the whole history of the previous Government. He was in the Treasury and


he knows that certain steps were taken regarding public expenditure in December which had an effect on the rate of economic growth. The Government have had to take into account all the steps then taken.
The principal prospect for the development of the British economy lies in a steady rate of growth, export led as far as possible, and fortunately we now have that prospect. Export demand is now expected to rise strongly for some of our goods because of the overseas competitiveness for manufactured products. This has greatly increased since sterling was floated in June 1972, by 14 to 15 per cent.
The availability of these export opportunities, given the fact that British manufactured goods are now highly competitive, provides the opportunity for us to improve on our rate of growth in the future. But the decision which is to be influenced will be made by British industry and it is for British industry to take account of this new situation, to invest for exports, and to take account of the fact that the economy is, increasingly I hope, export oriented and that a higher proportion of investment must be made for supplying exports which are now highly competitive.

5.45 p.m.

Mr. Higgins: I apologise for intervening again, but this point is so important that we should get it right. What the right hon. Gentleman has just said reflects the underlying forces which were at work at the earlier stages, indeed some months ago. But it is important that he should not give the wrong impression on the situation which has arisen, which he described as stop. He must analyse the fact that it is due to the two sets of factors which I have mentioned and that it is not a stop in the traditional sense. If he expresses the view that it is a stop in the traditional sense, he will encourage industry in the view that we are in a perpetual state of stop-go. I do not believe that this is so or that the right hon. Gentleman believes that it is so. It is important that we should not encourage industry in that view.

Mr. Dell: If the hon. Gentleman is trying to claim that the steps taken by his right hon. Friend the then Chancellor

of the Exchequer last December were voluntary or planned, or were a U-turn by intention, he is deceiving himself and the Committee.
We have not changed investment incentives. We are hoping that the economy will grow on the targets which we have included in the Red Book. We indicate the availability of these export opportunities. It is the market forces, plus price control, which make it more profitable to export at the moment— about which industrialists also complain —and these in my judgment represent the best prospects for sustaining and increasing investment at present.

Mr. Norman Lamont (Kingston-upon-Thames): The right hon. Gentleman referred rather coyly to the forecasts for investment in the Red Book, but should he not tell the Committee that the forecasts are for a decline of 2 per cent, in investment?

Mr. Dell: Yes, but they are for an increase in manufacturing industry. I would have gone on to deal with the matter in a little further detail and given figures, but when I mentioned figures to the right hon. Member for Yeovil he immediately rose and rebuked me and said that was not the relevant point, so I abandoned the matter immediately.

Mr. Peyton: The right hon. Gentleman must not mislead the Committee and must not misquote me. I was not seeking to inhibit him from repeating what is in his book. All I asked—I suspect that he will not give an answer—was what was the present Government's view of the investment prospects in the years ahead for our country.

Mr. Dell: I must leave it to the right hon. Gentleman to sort out with his hon. Friend whether I should read out what is in my book.
I turn now to the question of company liquidity. There was a discussion about Government statements on company liquidity, and figures were given as to the net position compared with the figures which the Government had quoted after taking account of company indebtedness. The£14,000 million referred to as the current company indebtedness, which is to be set off against liquidity figures stated by the Government, is not expected to be called in.


I would not expect any Member of the Opposition to suggest that this money would be called in. We think that the figure of£10,000 million fairly represents the position. At any rate, we have no evidence that there is any serious liquidity problem. If there were to be such a problem, that would obviously be a factor of which we should have to take account.
My right hon. Friend the Chancellor has indicated to the banks that he would wish them to assist where necessary with investment and stock building. We are not at present aware that there are serious dangers in that situation. There may be dangers for particular companies, and in those cases we shall have to take account of them, and we hope that the banks will also take account of them.

Mr. David Price: Do I take that as an undertaking that if industry can provide any evidence over the latter part of the summer, which is about the time scale in which it is likely to happen, of being caught between inflation on the cost side and price control, so that companies have a liquidity problem, his Department is open to receive representations?

Mr. Dell: We would certainly want to know where there were such problems, if companies could not be helped in the ordinary ways from the various market sources.
As to the effect on investment, I emphasise that we have left unaltered the investment incentives handed to us by the previous Government. I think particularly of the 100 per cent, depreciation which should be, given the availability of demand, a great encouragement to investment. By international standards it is a considerable encouragement.
I know that certain companies are making representations that the investment grant system should be restored. We do not want to mess around again with that system. We think it much better that there should be stability in the matter, that companies should be able to rely on the position. Nevertheless, with that belief goes the hope that they will take advantage of the investment incentives, and 100 per cent, depreciation represents a considerable investment incentive.
There are also the regional development grants, and there is the decision to continue the regional employment premium. The reduction in interest rates which we have brought about should have a beneficial effect on manufacturing investment. As to price control, we have given an assurance that when the code is reviewed we shall have in mind the likely effect on investment of any decisions. Finally, we have announced that if we find that the Budget judgment was in any serious way incorrect there will be a second Budget this year, when there will be an opportunity to correct the direction if that should be necessary.

Mr. Maurice Macmillan: I apologise for being absent at the beginning of the right hon. Gentleman's speech, but I do not believe that he has dealt with the question of the sector flow of funds. If the flow of funds to the public and overseas sectors together is as the Government say it is, that will produce a flow of funds away from the third sector of the economy, the private sector, which could result in a deficit of£1,300 million to£1,500 million for industrial and commercial companies.

Mr. Dell: According to our information, there is much liquidity in the possession of companies which is not being used for manufacturing investment. We would expect companies to take a rather careful view of their stock-building plans. I think that it is agreed that stocks are relatively rather high in this country. Nevertheless, if companies have liquidity difficulties we would expect them to go to the banks, and expect the banks to be influenced by my right hon. Friend's request that, wherever necessary, they should take account of companies' investment and stock-building requirements.
It seems to me, on the basis of our information from the various reviews, that industry expects to keep busy in the course of the recovery from the three-day week. There is no sign so far of any cash flow problems on a wide scale. There is, as the latest trade figures show, a promising improvement in the non-oil deficit. There is a good export performance, with every prospect of a better performance, given the relative competitiveness of British manufacturing industry and the fact that it has been found that the three-day week was less damaging than it was thought to be at the time.


That in itself should have had less serious effects on industry's cash flow position, and less serious implications for the investment decisions of manufacturing industry.
In view of the position I have described, we have no doubt that the 52 per cent, corporation tax level can be accepted by British industry without damaging effects. But I emphasise once more that we shall watch the position, and we have an opportunity to review it later in the year. If the course of the economy needs to be corrected at that stage, we shall do so. But I do not believe that there is anything in either our economic position or the proposal we are discussing to dissuade British industry from profitable investment intentions.

Mr. Tom Boardman: The right hon. Gentleman does not appear to have directed his mind to the critical point that investment decisions cannot be turned off and on just because he will review the situation later in the year. Decisions to postpone investment will have been made in the light of the Budget, and will be confirmed or otherwise according to the right hon. Gentleman's reaction to the amendment. It is no good his telling companies, "We shall look again at liquidity later in the year and hope that you will defer making a decision on investment plans until we do so."

Mr. Dell: The hon. Gentleman does not provide evidence that significant investment decisions are being deferred because of the change in the rate of corporation tax from 50 per cent., as expected, to 52 per cent. On the contrary, I read this morning of the decision by ICI since the Budget to increase its investment budget. I have no evidence that there has been any large-scale deferment of investment decisions as a result of the Budget. However, we shall watch the situation, as is sensible, and if the course needs correcting later in the year we shall correct it.

Mr. William Clark: To put it mildly, the Paymaster-General is being very complacent about companies' liquidity problems. He talks all the time about an increase in the tax from 50 per cent, to 52 per cent., but that is not the whole story, as he knows.
Corporation tax was 40 per cent. My right hon. Friend the Member for

Altrincham and Sale (Mr. Barber) increased it to 50 per cent., but the carrot for that increase was the imputation system, whereby a company could distribute its profits and in doing so receive a certain amount of alleviation of tax on its dividend distribution. That was splendid, until the Prices and Incomes Board intervened and we had dividend limitation.
It is complacent of the Paymaster-General to talk about an increase from 50 per cent, to 52 per cent. It is an increase from 40 per cent, to 52 per cent., and we know that dividend distribution can rise by only 5 per cent. This is an extremely important point. It is one of the matters that is affecting investment in industry and industry's liquidity.
6.0 p.m.
From a psychological point of view when there is taxation of over 50 per cent—namely, 50 pence in the pound—there is a tendency for people to say, "All right, we shall incur this cost. After all, the Revenue is paying most of it." That is a matter which we must keep in the back of our minds.
I hope that the right hon. Gentleman will look again at the free depreciation allowance, which he said would be an added incentive to investment. It is an added incentive if it is truly free depreciation. The Chief Secretary will understand the point. If a person invests it is all very well saying that the rate will be 100 per cent, in the first year, but it may be that his profitability in the first year will not be sufficient to write off the depreciation. In that event he must carry forward. If he carries forward he is not allowed to write it off the next year and he is back to the 20 per cent. rate. If it were truly free depreciation for the investing company, the managers of such a company could determine how to write off the 100 per cent. —for example, 50 per cent, in the first year, then 40 per cent, and then 10 per cent. That would help investment.
I urge the right hon. Gentleman not to be complacent and not to put it about that industry is prepared to accept increased corporation tax from 50 per cent, to 52 per cent. The background is that industry has suffered an increase in corporation tax from 40 per cent, and it is not able to take advantage of the imputation system.

Mr. Robert Carr: On this occasion I do not want to take issue with the Minister about his partial account—indeed, most of my right hon. and hon. Friends would say that it was an inaccurate account of the events of the past few years. However, I may wish to do so on another occasion either on the Floor of the House or in Standing Committee. I think that the right hon. Gentleman should approach the matter with a little more humility and at least admit that there was a great deal of hindsight, to put it at its best, in what he was saying.
I remember being Secretary of State for Employment at the time to which he was referring. He said that my right hon. Friend the Member for Altrincham and Sale (Mr. Barber), who was then Chancellor of the Exchequer, over-reacted to the pressure of rising unemployment. I remember the attitude of the Labour Party when I was Secretary of State for Employment. I remember having to reply to debates month after month when the Labour Party was screaming at the Government to increase expenditure in many directions and to create expansion. Whoever is entitled to say that we over-reacted at that time it is certainly not the Labour Party, which was urging us to react twice as much as we did. That should not be forgotten.
I do not intend to speak for long but I wish to re-emphasise why it is that we have proposed the amendment. It is a fact that it is our driving concern that there should be good investment prospects for British industry. Investment by industry in all our productive resources is the source of our future welfare as a country. Such investment is a source of security for our future level of employment. Unless we invest more effectively, as well as in greater quantity than we have done as a country during the post-war period, we shall not be able to achieve our ambition to improve the compassion, fairness and general standards within our society. That is at the root of our hopes and fears for the future.
I emphasise that our concern, as expressed by the amendment, is about our future prospects. As my right hon. Friends the Members for Yeovil (Mr. Peyton) and Leicester, South (Mr. Board-man) made clear, what is being spent this year by industry in investment results

from decisions taken long before this Government took office. Indeed, much of what we spend next year will result from decisions taken long before this Government took office. We are worried about the decisions that will be taken by industry from now onwards. Those decisions will determine the level of investment from 1975 onwards. These are the prospects about which we are concerned.
We are concerned because even in the short run we do not find the information especially encouraging. My hon. Friend the Member for Kingston-upon-Thames (Mr. Lamont) pointed out to the Paymaster-General that his Red Book indicated a fall in investment. The right hon. Gentleman replied "Yes, but not in manufacturing investment." Perhaps I have not read the book carefully enough, but it does not appear on the face of it that the right hon. Gentleman is correct. If we look at Table 4, page 11, we see that as between the second half of this year and the second half of last year the Government are expecting public investment to decline by 4J per cent, and private investment to decline by 2 per cent. Further, they are refusing, unlike their predecessors in successive Governments, to give any forecast for the first half of 1975 compared with the first half of this year. I have pointed out to the right hon. Gentleman on many occasions since the Budget that the Government's refusal to make such a forecast does not increase our confidence or the confidence of industry and outside observers. As I have said, we are concerned about the prospects and we fear that the Government are being extremely complacent.

Mr. Dell: The right hon. Gentleman will agree that on the argument that he has just used the decline in investment is likely to be as a result of the policies pursued by his Government, including the three-day week. As for his reference to the forecast level of investment by manufacturing industry, the reference to that is to be found in paragraph 35 of the Red Book.

Mr. Carr: We can argue further about the cause, but the immediate prospects for expenditure in investment this year are not all that brilliant.
We are concerned about the prospects for expenditure in investment in 1975


onwards. As the Minister has pointed out, the record of investment by British industry has been inadequate. It has been poor compared with that of many other industrial countries. It is common ground that British industry's record at investment is one of the main causes for concern. It is not easy to discover the reasons. There are many reasons, and I doubt whether we know them all. Further, I doubt whether we are sure of the reason for our long-term relatively poor level of investment, and particularly the record of manufacturing industry, compared with that of other countries.
We are not pretending that this is only a matter of tax levels. It is something more profound and deep-seated than that. However, we say that it cannot be denied that the availability of cash for investment is clearly an essential ingredient if we are to maintain, let alone improve, the level of investment over the next year or two. It may be that industry will have the cash but will still not invest it. It is true that if it does not have the cash it will not be able to invest on the level which we believe, and the Government appear to believe, is necessary. We do not think that the Government are matching their hopes and beliefs with the action that is needed to bring them into effect. What we cannot escape is that much more money is now needed by many companies, as was mentioned by my hon. Friend the Member for Eastleigh (Mr. Price), to replace assets.
Therefore, to maintain the level of real investment much more cash in money terms is required, year by year, merely to meet the extra costs of new buildings, higher prices and new machinery. We are in a situation where industry needs more money, not less, merely to maintain the current rate of investment. Now, when the urgent need in industry is for more money for investment, the Government are taking four distinct actions all of which are designed to decrease the amount of money available to industry for investment.
First of all, they are intensifying the squeeze on profit margins. We admitted, by our actions under our counter-inflationary policies when in Government, that when we ask people to refrain

from obtaining the biggest pay increases their markets and their bargaining power could command, it is a matter of justice that we should put a restraint on profit margins to make sure that those who fix profit margins cannot get the maximum margins which their power on the markets could demand. This Government not only believe in that, but say that they must do it more severely than we were doing it. As a Government we were under considerable criticism from industry for squeezing too hard, bearing in mind future investment prospects.
Secondly, the Government are to a major extent financing the big increase in pensions by increasing the employers' contribution. Unless that is passed on in prices, and I fear that inevitably some of it will be, it will lessen the cash available to industry. Thirdly, there is the change in the rate of corporation tax, which means that a bigger proportion than was expected from reduced profits will be taken by the Chancellor, again reducing the amount of cash available to industry for investment.
Fourthly, under Clause 10 of the Bill the Government are saying that of this bigger total percentage of tax industry has to pay a larger proportion at an earlier date. That, too, will have a big effect on cash availability in the current year, or for as long as the surcharge on advance corporation tax continues.
It could be—and here we say exactly what we said about personal taxation—that a case could be made out to justify any one of these four elements which could operate to reduce the amount of cash available to industry. But what industry looks at is the effect of all four together. It is the totality of all that the Government have done and are doing that, we feel, carries a real danger of damaging the prospects for investment by affecting adversely the decisions which industry will be taking this year about the investment expenditure on which it feels justified in embarking in 1975 and onwards.
We cannot turn the tap of investment on and off at short notice. What is needed is general confidence now about what is to happen in about a year's time. It is that general confidence which will be crucial in influencing company decisions over the next few months and which, we believe, is being damaged by the totality of the Government's


actions in this Budget. We fear that the Government are complacent and are underestimating the danger which the Budget carries with it. As an example of this complacency—and I am sorry that the Chancellor has left the Chamber—I draw attention to the Chancellor's attitude towards the latest CBI industrial trends survey. The survey had just been published at the time of Second Reading and most Members had not perhaps had the opportunity to study it. The Chancellor said:
This new confidence"—
he had been speaking about what he believed was the growing confidence in industry—
is reflected in investment intentions."— [OFFICIAL REPORT, 9th May 1974; Vol. 873, c. 620.]
When I got hold of the survey the following morning, this is what I read:
The buoyant investment intentions of 1973 are no longer apparent.
It was an exact contradiction of what the Chancellor claimed was the sense of the CBI survey about the prospects for investment.
6.15 p.m.
I am sure that the Chancellor did not mean to mislead the House. It can only be that the wish was father to the thought and that his complacency about this is leading him to read into the information coming from industry things which are simply not there. Industry is not confident about its investment prospects. Quite the contrary. The investment confidence, the buoyant investment intentions of 1973 are no longer apparent.

Mr. Dell: The buoyant investment intentions of 1973 were knocked rather severely by the three-day week. My right hon. Friend was comparing the April CBI review with the January review. That showed a moderate improvement in confidence.

Mr. Carr: That is a totally different matter. Even if that was what the Chancellor was trying to say, and I do not believe that was the case, it would be an incredible view for any Chancellor to take. Whatever we may argue about the events at the beginning of this year—and I will not go into that now—if the Chancellor and the Paymaster-General are right in saying that it was the events at the beginning of the year which

knocked investment confidence for six then there is all the more reason to build confidence up again. Instead of doing that, he is knocking it further down. The fact is that the buoyant investment intentions of 1973, which certainly received a check because of the events of the winter, are no longer apparent. Far from encouraging them to reappear the Chancellor is causing them to disappear even further.
This is our fear. This is why we have suggested this probing amendment. We wish to sound a warning and say to the Government "We believe you are doing things which will have an effect upon industry which neither you nor the country wants and which, if you do not correct things pretty quickly, will lead to less prosperity and much higher unemployment, which no one wants."

Amendment negatived.

Mr. John Pardoe: I beg to move Amendment No. 46, in page 6, line 17, at end add:
'on profits calculated in real terms on the basis of assets valued by reference to the movement of the Retail Price Index since the date of purchase.'
We are dealing here with inflation accounting. We have already looked at the problem of indexation during Second Reading and in Committee. I also raised it some months ago in a debate on general economic policy. We dealt with it during a debate on an amendment tabled by Tory back benchers last week. We return to the issue now, but in a very specific form.
What we are debating is a fraud. Yesterday we debated the fraud perpetrated upon small savers. Unfortunately, I was not able to be present because I was attending a meeting of the Public Accounts Committee. My hon. Friend the Member for Colne Valley (Mr. Wainwright) spoke from the Liberal benches on that occasion. Last week we were debating fraud on surtax payers. Now we are debating fraud on companies and shareholders, the fraud inherent in stated company profits. As I have already indicated, it is part of the overall debate on indexation, it is specific, and it seems to me that it is a very important debate in the context of the effect that our present accounting system will have on investment and industrial renewal.
The Government are afraid of accepting the fact of inflation, as I understand


from speeches we have had on previous debates on this issue, and any Government are afraid of accepting it. They regard it as a sin. But in my view inflation and the acceptance of inflation is something with which we have to come to terms—and we had better come to terms with it sooner rather than later because to recognise that inflation exists is no more foolish than to recognise in a previous era that German rearmament existed before the war. The parallel is not entirely irrelevant.
Many people then knew that German rearmament was taking place but they did not like what they knew so they invented a cloud cuckoo land to accord with their own wishes. They pretended that German rearmament did not exist—at least, did not exist to an extent which made it necessary for us to do anything about it. The argument went as follows: "I am opposed to rearmament of all kinds. Any facts which lead me to the conclusion that Britain ought to rearm are therefore decidedly unwelcome. Any recognition of the extent to which Germany has rearmed would be a fact which might lead me to conclude that British rearmament was necessary; therefore, I will ignore the fact." So it is with inflation.
None of us likes inflation but few of us are willing to accept the measures necessary to conquer or even to meet it. Therefore, we do not want to know about it and we will not recognise it and the Government will not recognise it. If I may put it in context, on Friday of this week the Government will announce the Retail Price Index for the latest month. It will probably show an increase of 1-7 to 1-9 per cent. In annual rates that is a rate of inflation of between 21 and 23 per cent. That is unparalleled, certainly since the 16th century. In my view it is on the verge of catastrophe and it is the greatest single crisis that this country faces.
Perhaps I may move from the parallel of military dictatorship in pre-war Germany to the present military dictatorship in Brazil—although the example of Brazil is not necessarily relevant to indexation. Brazilian money correction has been quoted in these debates so far, often as an example of how modern economies ought to deal with the prob-

lem of hyper-inflation. There is a great deal more to the Brazilian attack on inflation than indexation. There is, for example, the statutory prices and incomes policy enforced by the Brazilian Government. There is the whole question of the floating exchange rate within crawling pegs.
To revert to the specific point that we are discussing, I raised this issue in the debate on the Second Reading of the Finance Bill when I spoke of inflation as creating disunity, as opposed to war which generally united a nation. In facing up to inflation, and in particular advocating indexation, I was endeavouring to remove the disunity factor, the disuniting effect of inflation in our society. Unless we remove that disunity effect we shall not make the united attack on inflation that in my view is necessary.
Specifically turning to company profits —and here I believe growth in the economy generally and profits are very closely linked, whatever the Government may feel—sound investment, by which I mean profitable investment, is linked to profitability. We have therefore to consider what kind of investment is profitable. I am amazed, for instance, at what some company chairmen, in their public pronouncements about their companies' efforts over the past year or so, say when they are endeavouring to attract savings and to encourage their shareholders' morale. They seem to me to be overstating the case at least, if not indulging in a direct fraud. Perhaps they are comparing themselves and the performance of their companies in terms of return on capital with the advertisements which, unfortunately, I have to look at on my way to the House, on the Tube stations day after day—"Mr. 9 per cent." of the National Savings advertisements.
I, and I believe most company chairmen, would regard as totally unacceptable such a rate of return on investment in British industry, but incredibly, many company chairmen seem to think that 15 per cent, is acceptable. In the present inflationary situation it is entirely unacceptable. Why should I invest money in any British company at a rate of 15 per cent, bearing in mind the rate of inflation, which is over 20 per cent., and bearing in mind the net return after tax?
A few major companies in this country are now offering a return of more than


15 per cent, and in my view even that is not enough. What is the position over profits in the present state of accountancy? Of course they look high. They are constantly attacked—at least last year's figures are—as being very high. We see all kinds of very fancy figures. Chairmen of companies are as responsible as anybody else for making these figures appear even more fancy than they are. But they are fooling us—and one often feels on reading the detailed statements that they seem to fool the company chairmen who make those announcements and—much more important—they also fool the shareholders and the employees.
What is the reality of the present situation in British industry? De Zoete and Bevan, in a survey which has been circulated to many hon. and right hon. Members of the House, have established the position of a hypothetical company started in 1966. They assume a rate of inflation starting at 4 per cent., dropping to 3 per cent, and then rising, in 1974, to 16 per cent. I cannot think there is any hon. or right hon. Member of the House who would deny that rate of inflation in 1974. Certainly, in the financial year 1974-75 it will not be less than 16 per cent. Under existing methods of accounting the basic pre-tax earnings of such a company would seem to have quadrupled in this eight-year period. In facts its post-tax earnings calculated in real terms have fallen and show no increase at all. This is a nil growth company, in spite of the fact that according to the Exchequer and all the official figures, the earnings of this company have quadrupled over the period.
The NEDO Report which was produced on 126 engineering companies' accounts between 1965 and 1971 showed that these accounts demonstrated that these 126 companies ploughed back over£124 million of their profits. Splendid!A marvellous rate of investment!In fact, in real terms they ploughed back only£10 million—and that is not just a recipe for stagnation, it is walking backwards for Christmas with a vengeance. Phillips and Drew, in an investigation of 64 engineering companies, showed that the methods of inflation-accounting proposed by the professional accountants would produce real profits only one half those actually stated in 1972.
6.30 p.m.
Perhaps I could best describe what the amendment seeks to do by a simple example from the Economist. It will have to be a simple example to enable people outside the Committee, if not inside, fully to understand the point, because accountancy has often wrapped itself up in a mystique of its own creation. All professional bodies tend to indulge in that. The example appeared on 27th April. It concerned a wine merchant who bought 1,000 bottles of wine for£1 a bottle and sold them for£2 a bottle. That foolish wine merchant thought that he had made£1,000—of course, excluding other costs for the moment. Previous experience would persuade him that he had made£1,000 profit and he could then take that money out of the business and happily depart to Majorca to spend it. However, if, in the next financial year, replacement of those 1,000 bottles was to cost him£1,300, he would need another£300 of working capital. I suppose he could go to the market, but the prudent wine merchant would surely set aside£300 of additional working capital from the profit he made this year and declare only a profit of£700. Speaking not as an accountant it would seem to me that£700 was the real profit, and£1,000 was the mystical and monetary illusion.
This has been happening on a national level. In 1973, for instance, British companies made record profits after tax and interest at£8-7 billion. That is a lot of money and represents an enormous increase on the previous year. It is a scandalous amount according to some Left-wing commentators. The money spent on stocks rose fivefold to£2-6 billion and of course that increase has not been taken into account in the calculation of the total profits of those companies. I believe that stocks should be revalued in terms of the change in the retail price index over the year. It is nonsense to leave stocks in the book either at the rate at which they were bought, or, worse still, at a written-down rate, when they will cost between 20 per cent, and 30 per cent, more to replace. I go further than that, however. In my view net current assets should also be revalued to take account of the change——

Mr. Dell: I wonder why, if the hon. Member thinks that a relevant factor for


stocks is the replacement cost, he suggests in his amendment that the measure should be the retail price index.

Mr. Pardoe: I shall deal with the retail price index in a moment because it is an important factor and is crucial to the debate which is now raging as a result of the report of the Committee under Mr. Sandilands.
Current net assets should be revalued to take account of the change in the retail price index. The impact of inflation on those assets should be deducted from taxable profits. What effect would that have? There are all sorts of consequences for Government revenue, and I leave the Government to deal with that. They may say that it would result in a diminution of revenue, or they might decide that it would even account for a dramatic increase. There would be a marked redistribution as between companies which have to pay a large amount of tax and those which pay comparatively little—a substantial redistribution of the tax burden as between different sectors of industry.
Perhaps I may quote again from de Zoete and Bevan:
The current basis of taxation weighs unfairly upon manufacturing industry and this bias becomes greater the higher the rate of inflation. In the interests of fairness it is necessary to alter the basis of assessing taxation in order to allow for the fall in purchasing power of money even though this means the taxation of unrealised profits of companies holding large property assets.
I do not suppose that would be desperately resented by the Government.

Mr. J. Bruce-Gardyne: It depends on what sort of property assets they were.

Mr. Pardoe: Of course it does. Not all property assets are taxable or regarded by the Government as desirable to be taxed. Philips and Drew have drawn up, in amplification of this general point by de Zoete and Bevan, a table showing how the various company sectors would fare if inflation accounting were in force. It shows that the Chancellor would reap an enormous windfall from property. He would not reap much from motors and distributors, or electricals. In other words, manufacturing industry would show very

much reduced taxable profits on this basis. Property, entertainment and breweries would show a substantial increase in their taxable profits. According to Philips and Drew, in the period covered property would have shown an increase of 310 per cent, in taxable profits, whereas motors and distributors would have shown a reduction in their taxable profits of 60 per cent., electricals 50 per cent., engineering and general 50 per cent., and so on. That table merely demonstrates the general truth of de Zoete and Bevan's observations.
On 8th April the Financial Times, in what I thought was a wise leader, stated that inflation accounting ought to appeal to the present Government
which wants to encourage production and discourage what it believes to be financial spivvery.
I want to encourage production and discourage what I believe to be financial spivvery, and therefore in this case the Government and I are at one and I hope that they will therefore be prepared to accept the amendment.
I do not want to enter into the details of the argument which the Paymaster-General put to me. In assessing how inflation accounting should be operated, whether by simple application of the retail price index or by the replacement cost of particular products and stocks, the simplest formula is the one to go for. Therefore, I see no reason why we should not simply have a coefficient of inflation worked out, as in Brazil, on the basis of the retail price index, though in this country it could cover the whole of the United Kingdom. In Brazil it is possible only to deal with the facts for operating the system in one State.
We should forget all the complications and simply revalue every aspect of company accountancy according to the effect of the retail price index, certainly on stocks and assets. I know that any Government would have reservations about general indexation. Governments would regard that as an admission of impotence in the face of inflation. However, I am a realist and I accept that inflation exists. It must be recognised and faced up to. What is more, I do not regard the present rate of inflation of between 20 per cent, and 23 per cent.—which is what this month's retail price index will show the


rate to be on an annual basis—as necessarily the peak. I take the view that there is almost no way in which a democratic Government will be able substantially to reduce it.
I take the view that that rate of inflation is the death knell of democracy, but I also take the view that democracy is almost incapable of facing it, and within the free world—within the western markets—it is inconceivable that a united approach will be made by all Governments, and it would have to be a united approach by all the Governments involved within the near future—by which I mean within the next five years—to bring this problem substantially under control and beat it. Therefore, being realistic, and perhaps even pessimistic, I say that we have to live with this problem, and unless we do our industry will be undermined by the figures which I have quoted.
Indexation is one aspect of the battle against inflation, and I think that inflation accounting on the lines that I have indicated is a simple matter. It would end the distortions within our society. Perhaps I may quote finally from the introduction to the de Zoete and Bevan Report. Dealing with the whole sector of British industry which had been investigated, and with the whole question of British industrial practice, the report says:
In particular, this study suggests that the equity earnings of British industry have shown no growth over the last seven years.
I believe that the British economic performance has ranged from the disgraceful to the damnable, but if that figure is true —and I see no reason to disbelieve it—it is worse. It leads one to conclude that the British economy is in a steady decline from which it will take far more than the present Government to rescue it.

Mr. Nicholas Ridley: I entirely agree with the diagnosis of the hon. Member for Cornwall, North (Mr. Pardoe) of the seriousness of our inflation and of its destructive effects on our society. I should like to deal with two points made by the hon. Gentleman with which I fundamentally disagree before I come to one point with which I entirely agree.
The hon. Gentleman seems to be placing a lot of reliance on the statutory control of prices and incomes. It astonishes me that since we have had

a statutory control of prices and incomes the rate of inflation has doubled, if not more than doubled, and how anyone can continue to pin his faith on a Canute-like law to deal with economic affairs which are obviously and clearly out of control bothers me and makes me doubt the hon. Gentleman's conversion to believing that inflation is so serious that it should be tackled at the root—the root being the inflation of the money supply.
The hon. Gentleman seems to cling to the hope that we can blame the foreigners for our domestic inflation, as though we had caught some sort of nasty Asian 'flu that was nothing to do with us. I fear that the reheating mechanism which is causing inflation to take off faster than ever before is caused by our heavy foreign borrowings, which are now mounting and swelling the money supply.
Far from believing that we have reached the peak, turned the corner, or reached the point at which we might stabilise inflation, I believe that it will continue to accelerate in the light of the enormous deficit which the Government are running, coupled with the enormous amount of foreign borrowing, which is on top of the deficit last year and this year. When I hear the Secretary of State for Prices and Consumer Protection talking as though the rise in the price of food was levelling off or flattening out, I wonder how the right hon. Lady can deceive herself so much.
6.45 p.m.
Where I come to complete agreement with the hon. Gentleman is in the substance of what he was trying to say, and I welcome his out-and-out conversion to the feeling that "profit" is no longer a dirty word. Indeed, we have the Chancellor of the Exchequer as well as the Liberal Party and all parties in the Committee now embracing profit not as something synonymous with sin, but something to be encouraged, and I look forward to my Labour and Liberal opponents at the next election, whenever it may be, defending bank profits and the profits of food manufacturers; and urgent higher profits throughout industry, the farming world and every sector of our economy. I look forward to that and will welcome it because the hon. Gentleman is right, in saying that the level of profits is declining, is inadequate for maintaining the


necessary reinvestment in plant and machinery and is grossly overstated in the figures that we see before us.
I should like for a few moments to discuss the terms of the amendment, because it must now be common ground that we all need to adopt systems of inflation accounting. The difficult question is what type of system should be adopted, and the hon. Gentleman suggests that assets should be valued in relation to the retail price index. If they go up by more than the index that should be taken into profit, but if they go down in relation to the index that should be knocked off the profit before tax is computed. That is a possible approach to the subject, except that it is impossible to value all assets every year, particularly property and machinery assets. It would seem to me to be a task of superhuman dimensions, particularly if it results in a greater or lesser charge to tax depending on what value is put on which asset.
i do not think that the amendment goes to the root of the problem either, because the root of the problem seems to be basically a question of the replacement of machinery. The heavier the industry, the more expensive its capital equipment, and the longer the gestation period of what it produces, the more severe the problem. Perhaps I should separate those two points.
If one considers the length of time that it takes to produce the goods—the gestation period—if one is selling cigarettes in a shop, one can buy them on a Monday morning and sell them in the afternoon and there is no problem. But if a firm is building a ship, it may be two years from order to delivery, and during that period the firm's profit is destroyed by a high rate of inflation because it cannot curtail its costs, and if it were to tender to allow for high rates of inflation it would not get the job. The firm starts in a fundamentally unprofitable situation in tendering for contracts such as that.
At the same time, however, the firm has to replace its assets. Those assets are expensive, and the question of inflation accounting becomes extremely important. I have heard it said that a shipyard should be replaced every seven years under modern technology, but to replace

docks, quays, sheds, machinery, and so on, would cost twice as much at the end of the seven-year period. It seems to me that that type of industry is hit twice by inflation, but the only part of the problem that we can deal with in the amendment is the firm which has to replace expensive machinery which costs far more the second time that it buys the machinery than it did the first time.
In order to achieve inflation accounting we must consider a system based on depreciation. We should link the amount which can be depreciated to the resale price index. We cannot have a system involving annual valuation, since that would be too burdensome. Some work has been done on these lines, but the best work that I have seen relates to linking depreciation to the resale price index.
We should also quote profits in two ways. They should be quoted as to the actual pounds made in the year concerned and also in terms of the depreciated profits from the year previous and the year before that, so that, although profits may be seen to be growing at 10, 15 or 20 per cent, a year, it is realised that in real terms they are hardly growing at all. This would help to remove one of the most unfortunate effects of our present inflation—that it divides the nation, and sets up bitterness, envy and greed.
When people see these large increases there is conjured up for them the possibility that they are available to the shareholders, who are probably a few people with large yachts cruising in the Mediterranean, a process with which another£300 million obviously helps. Alternatively, people think that if only those profits could be "got at", they would be available for wages for workers in the business.
Of course, neither is true. The profits are for investment, for distribution to shareholders, and half of them—or 52 per cent, now—go to tax. So achieving an understanding of what profits represent and how big they are would help.

Mr. Dell: The hon. Gentleman referred to tenders under a system of inflation accounts. Would he intend a company to tender on the basis of its inflation accounts or on the basis of the money costs that it had actually incurred?

Mr. Ridley: I was perhaps wrong to introduce the point, and the right hon. Gentleman does me a service by allowing me to withdraw it. My point is that many of our heavy industrial concerns are bound to lose money in inflationary times because of the difficulty of supplying long-term tenders when there is inflation. It is those companies which are already in trouble which then get hit, because they cannot depreciate their assets quickly enough without inflation accounting.
Companies like those in the heavy electrical plant industry and in shipbuilding early on get into serious financial trouble and have to be bailed out to a large extent on some occasions by Government. It is obviously absurd to design a system of taxation which causes shipbuilding companies to have serious financial problems and then have to give the money back in grants and subsidies, as has had to be done over the years. It is that double attack that inflation produces on those companies to which I was referring. But of course it is not possible to index tender prices, and I would not suggest that it was.
The obstacle, of course, is partly that we do not agree among ourselves on how inflation accounting should be computed. I am not an accountant either so I would not like to push my view too strongly. But one knows that, at the end of every paper that comes up within Government on this subject, there is a note saying, "The Treasury will not agree, of course, because it will lose a great deal of revenue." This is a blocking mechanism on any action by Government, and it is true. The reason that I did not speak on the last amendment is that, instead of criticising a corporation tax rate of 52 per cent., I would prefer to see higher rates still, if necessary, provided that they hit the companies which were making real profits but fell more lightly on companies which were making only paper profits.
Therefore, if it were necessary, following the introduction of inflation accounting which resulted in a different basis of profit computation for tax purposes and a loss of revenue by the Treasury, I would wear an increase in corporation tax to keep the revenue at its proper level. But if we had inflation accounting,

and revenue from corporations dropped dramatically, as I suspect it would, it would prove that we were taxing companies too hard; it would prove that half, or whatever the proportion is, of the money that the Treasury gets in corporation tax is the product of taxing paper profits. We should desist and seek other areas in which to raise the money we need for the Government's expenditure.
But at least we should not blind ourselves to the need to know what is happening and to try to make it possible for industry, whether service or manufacturing, heavy or light, to live with inflation. Inflation brings enough problems without destroying our industry.

Mr. Ian Lloyd: The Committee owes the hon. Member for Cornwall, North (Mr. Pardoe) and Messrs. de Zoete and Bevan a considerable debt of gratitude for having given us the opportunity to discuss this interesting problem. It has the same sort of fascination for political economists—which is probably what we all are in the Committee—as the fusion reactor has for physicists. Both seem to contain at their core something which man seems unable to produce a mechanism effectively to contain. Certainly this subject has profound economic and political implications for our society.
The hon. Member for Cornwall, North made an interesting remark when he said that in his analysis we were dealing with a fraud when we applied the existing fiscal system without taking any account of inflation. I wondered whether the index system proposed—many complex and interesting systems have been proposed to deal with this—does not suggest that we are substituting a recognition of a flaw for a fraud. 1 imagine that what we are proposing on a wider and more significant scale could find its analogy in motor vehicles. If a motor car regularly showed 90 mph on its speedometer when it was in fact doing 45 mph sensible people would say "Get a new speedometer which reflects the reality of the situation". Others might argue that this would be too difficult and that we should change all the speed limits in the country from 45 to 90 mph. Then the illusion outside would match the illusion inside.
There would be a great danger, if we were to move deliberately and openly towards a nation-wide system of reflecting the realities of inflation, that in this way we would be altering all the national speed limits so as to make the illusion outside match the illusion inside. There are some instances in which this is tempting, in many senses of the word, but in a State like ours there are so many areas in which the financial limits are directly controlled by the State that, even if one could accept this argument and apply it to the fiscal system, I wonder whether this would set an example which would have to be widely followed, and whether one would then have to say that all pensions, for example, must be immediately adjusted in relation to some form of indexation. After pensions, one would move to the salaries of civil servants, and there would be no reason for not doing so.

Mr. Ridley: And Members of Parliament.

Mr. Lloyd: And Members of Parliament.

Mr. Pardoe: The hon. Gentleman might care to look at the Members' Pension Fund. He might then change his mind about whether we need a general indexation of pension funds. If ever there was a fraud perpetrated on 630 people in this country it is the Members' Pension Fund in the present inflationary situation.

7.0 p.m.

Mr. Lloyd: I entirely accept that qualification, and it makes my point. The more one looks into it the more one discovers fraud or flaw, whichever analogy one may care to choose, running right through the system.
Are we to attempt to devise an enormous legislative framework which will empower the House of Commons or the executive to deal with the symptoms en masse? That is the only way to do it. I have suggested before that, in a sense, this is a confession of defeat on the part of central Government, and that is what the hon. Member for Cornwall, North said at the end of his speech.
The practical problem of introducing indexation right across a complex modern economy is so vast that we should not underrate it. On that ground I take issue

with my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) —not on his analysis of the need or desire for a more sensible recognition of the situation
.
Hon. Members may know that there is an unfortunate psychological condition known as hypomania. I wonder whether there is not a sense of national hypo-mania surrounding the present financial situation. The hypomaniac will go into the high street and spend£1,000 which he does not have in his pocket without realising that he has not the resources to back his desires. When he is in an extreme hypomaniac condition the lack of resources presents no difficulty to him. We may possibly all suffer on a small scale from hypomania. I mean by that that every State organisation, private company, organisation or private individual, faced with a limitation of resources, ignores that limitation and says "I will spend 5 per cent. What does it matter?".

Mr. Ridley: Is my hon. Friend talking about the present Government, the previous Government, or Governments before that?

Mr. Lloyd: My hon. Friend makes the point I was about to make. He suggested earlier that placing one's confidence in State control of incomes and prices does not provide the answer, and he went on to say that the profound cause is the money supply. If one looks at the record of the attempts to deal with these problems by the vast apparatus of bureaucratic State control one sees total failure. The United States went right through phase 1, phase 4 to phase zero and came out at the other end. We have had phases 1, 2 and 3 and we are out at the other end. We both still have inflation.
The hon. Member for Cornwall, North begged the question whether inflation can be controlled by democracies. That is a question which the House should ask and consider seriously. The only qualification I make is that there is not much evidence that the totalitarian States are much better at it. Therefore, a proposal to give democratic Governments for 18 months or two years Draconian powers to intervene in the economic system would not necessarily give us the answer to our problem. We do not want to go too far into the philosophical question of the relationship between particular


types of Government and the power which the modern State has to control inflation because we could talk about that all night and I do not think that the Committee would wish to do so.

[Mr. OSCAR MURTON in the Chair]

Mr. John Cope: This debate is of considerable importance and interest. It is being carried on in penny numbers. We debated the subject in Committee on Thursday night and it has come up again tonight in the context of corporation tax. Potentially, the amendment is much more expensive from the Government's point of view than was the previous amendment, which would have altered the basic rate of corporation tax from 52 per cent, to 50 per cent.
I do not know how expensive the amendment would prove to be—the Paymaster General may be able to help us on that—but we can get an idea by looking at the difference between the outturn of corporation tax last year and the estimate of what it would have been this year if no other changes had been made. The expected increase in the take of corporation tax is£600 million, which is a great deal more than the£130 million which the previous amendment would have cost in a full year. That is a measure of the extent of the fraud, if it is a fraud.
Inflation is not the only reason for the change between last year's outturn and the estimates for this year, but it is a large part of it. We should not take too literally the figures which are provided, because they are not usually accurate. Last year the estimate of the outturn of corporation tax was wrong by about£200 million—10 per cent. It was wrong in the right direction from the Government's point of view because it came out higher than was expected. I suspect that inflation may have had a good deal to do with that.
My main argument concerns whether or not the retail price index should be used across the board. I entirely agree with the hon. Member for Cornwall, North (Mr. Pardoe) that we do not want to get ourselves into too complicated a system—the simpler the system, the better. At the same time, it is no good to say, as the amendment does, that

assets—by implication, all assets and, presumably, liabilities as well—should be valued by reference to the movement of the retail price index. The retail price index has not much to do with the way in which property prices move in a particular year or over considerable periods. The application of the retail price index to property figures would not help. That goes, too, for many other items, but property is perhaps the most important example.
It would be nonsense to apply the retail price index to cash assets or to cash value, such as creditors, debtors and so on——

Mr. Pardoe: If in any year the property index goes up faster than the retail price index it means that property is in shorter supply than all the items categorised in the retail price index. In that case, should not we at that point, through our fiscal system, encourage the provision of more property?

Mr. Cope: That may be so, but it is rather a peculiar way of doing it. It brings another set of flaws into the tax system which may have the desirable effect which the hon. Gentleman wants but is not the right way to make market forces move.

Mr. Ridley: Is my hon. Friend aware that we already have a property tax called rates that is levied annually on all property? It has not proved to be a popular tax among the electorate, especially when it gets high. It is probably the least electorally popular of the various alternatives before us.

Mr. Cope: I agree. It is a matter of great regret that when we debated the matter, the Liberals were not present. But surely in talking about the assessment of corporation tax, we must look at property, for it is one of the most important reasons why inflation accounting profits differ from historic cost profits.
My hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) spoke about the replacement of machines as one of the crucial factors in terms of inflation accounting. I wish to point out that the replacement of stock is equally important.
Several hon. Members have referred to the tax system as at present based as a fraud, or have used words to that effect. I have on a previous occasion referred to


the honesty of Chancellors of the Exchequer. I was somewhat put down by the Chief Secretary to the Treasury, who said that he was not sure whether it would be more honest to index the reliefs and rates and then to increase those rates to obtain the same yield. I believe that it would be more honest to act in that way. The analogy about speed limits and speedometers was an accurate one. I think we tend to fool ourselves if we suppose that it does not matter whether we alter either of these things. If we index profits and increase the rates of corporation tax to raise the same amount of revenue, people will have a clearer idea of how much tax we are raising on those profits, and from whom. We should get a better idea whether this is acceptable in economic terms, and also whether it is acceptable to the public.

Sir John Hall: My hon. Friend the Member for Gloucestershire, South (Mr. Cope) said that this was an important debate. My hon. Friend is one of the signatories to new Clause 9, which calls for a provision on the lines required in this amendment by the hon. Member for Cornwall, North (Mr. Pardoe), although it refers mainly to the proposals made by the chartered accountants. I agree that this is a most important debate, and it is a great pity that there are not more hon. Members present to discuss this topic. Because of its far-reaching implications, this is one of the most important debates in the Committee stage.
The hon. Member for Cornwall, North. in an interesting speech, said that the situation was not unlike that which faced this country in the post-war years when we were considering the effects of German rearmament. Indeed, that is an exact parallel. I suggest that rapid and increasing inflation is as destructive as and more desperate even than a war. It certainly is productive of national disunity, whereas when a nation faces an outside threat it tends to create unity rather than disunity.
The hon. Gentleman referred to the little "Neddy" Report on the mechanical engineering industry in 1971. He quoted some of the profit figures which came from that survey, and perhaps I could quote some examples from that report to emphasise the point. The report pointed out that profits over the five years covered by

the review grew, not by 57 per cent., but by only 13 per cent.—in other words, by less than 3 per cent, a year. The survey also pointed out that in respect of taxable profit instead of a figure of 41 per cent, going in tax in 1971, the figure was not 41 per cent, but 53 per cent. Therefore, a large number of firms—and the survey covered 126 of them—were left with a false impression as to the nature of profit, the amount put into reserve and the true burden of taxation upon them.
7.15 p.m.
We have heard a great deal in recent years about inflation accounting. This was stimulated at first by the Institute of Chartered Accountants, which published a pamphlet entitled, "Accounting for Changes in the Purchasing Power of Money". If the recommendations in that pamphlet were taken into account, the effect would be to require quoted companies to publish, within the next two years, supplementary accounts showing the impact of inflation on profits and assets. This would be an illuminating exercise.
When the Institute of Chartered Accountants first produced the report— the committee responsible for the document was the Accounting Standards Steering Committee—my impression was that it created a certain amount of concern among members of the Treasury. I believe that it was for that reason that during the Conservative Government my right hon. Friend the Member for Worcester (Mr. Walker) decided to set up a Government Committee to consider again the implications of inflation accounting and how it could be implemented.

Mr. Dell: I do not think the hon. Member should be unfair to the Treasury since the then Chancellor of the Exchequer, the right hon. Member for Altrincham and Sale (Mr. Barber), was associated with the right hon. Member for Worcester (Mr. Walker) in setting up that committee.

Sir John Hall: I am glad that the right hon. Gentleman has drawn my attention to that fact. I think it is true to say that the Treasury was not favourable to the implications in the report of the Accounting Standards Steering Committee. I understand that the report of that


committee will not be published for about two years. Since this matter is important and urgent, I believe that the committee should be asked to speed up its study and produce its report much earlier than was envisaged. It should be able to do that because it has the previous work carried out by the chartered accountants to go on. It is unlikely that it will produce any new factors or arrive at a different conclusion. The situation which now faces industry and the country and the fact that the figures of profits and taxation are not correct emphasise the need for speed.
Let me quote an example from a modestly-sized company in respect of the impact of inflation on accounts and on the present taxation system. A group of companies with which I am personally concerned recently published its end-of-year accounts. Its profits were up fairly satisfactorily, by a figure of 20 per cent., and in money terms this appeared quite reasonable. I am sure that it would have kept the shareholders happy if the true facts had not been pointed out to them in my chairman's review. Unlike the company chairman to whom reference has been made, I was not over-optimistic in drawing the attention of the true facts to my shareholders. When we take into account the profit after tax, it appears that there has been a fall in real profits of nearly 10 per cent. It is true to say that the experience in many other companies has been almost identical, if they apply to their accounts the inflation accounting procedure recommended by the chartered accountants. If this is so, the impact of taxation on a company is far more severe than anybody has been led to believe. We are deceiving ourselves if we think that the tax is as modest as 52 per cent., for the true tax on real profits is a great deal higher.
Only three hon. Members, excluding myself, have taken part in the debate so far, and all of them sit on the Opposition side of the Committee. I am sorry that many hon. Members on both sides have not taken part in order to emphasise the urgency and importance of this problem, if, indeed, it requires emphasising. I am certain that the Paymaster-General appreciates as well as anyone else does the long-term damage which can be done to the economy if the dangers inherent in

the present situation are not realised and the fiscal system is not adjusted to take account of the true nature of profits.
We do not want to prolong this debate longer than necessary, and I am sure that we do not have to re-emphasise the points which have been made. I conclude, therefore, by asking the right hon. Gentleman to assure us that the Government-sponsored committee studying the problem will be asked to report not within two years but within the next few months. It should not be impossible for it so to do. The Government should then present the House with the committee's report and recommendations, which would enable us, within the next fiscal year if possible, to bring into operation accounts which would be a much truer reflection of the operations of a company and its profits.

Mr. Dell: The hon. Member for Cornwall, North (Mr. Pardoe) initiated an interesting debate. I imagine that that was his intention in moving the amendment. I hope that he does not propose to ask the Committee to divide on the amendment, although I understand that he still reserves his position. If he decides, in the light of my reply, to ask the Committee to vote I shall have to ask my right hon. and hon. Friends to vote against the amendment.

Sir John Hall: Am I too quick in assuming that the right hon. Gentleman will ask his right hon. and hon. Friends to go into the Lobby in his support without their having any idea of what we are debating?

Mr. Dell: My right hon. and hon. Friends know what we are debating and will go into the Lobby in the light of their own careful judgment of the subject. I hope that they will take my advice in doing so.
This is the third debate on indexation that we have had in the last few days. We had one yesterday on the indexation of savings. I take it that these debates emphasise the concern in the Committee about inflation and its consequences. I do not want to widen the debate to the question of indexation generally, since I had something to say about that yesterday, but I would point out now that to accept the indexation of accounts has wide implications—indeed, that the cones-


quences and implications become wider the more indexation is used.
The hon. Member for Cornwall, North speculated about the effect of indexation —of inflationp-roofed accounts—on the tax yield from companies. He did not know whether the yield would go up or down. The hon. Member for Cirencester and Tewkesbury (Mr. Ridley) thought that it would go down and that, therefore, Treasury Ministers had been supplied by their officials with a note which said "Do not agree to this: it will reduce tax revenue". I cannot give any estimate of the cost of the amendment. It is not necessarily a cost. After all, the yield of company taxation depends on the rate of company taxation, and higher or lower profits will yield higher or lower tax dependent on the rate of taxation which is imposed.
The hon. Member for Cornwall, North may be right in suggesting that the real impact of a provision such as he proposes might be to alter the distribution of profits as between companies rather than to have any necessary effect on tax income from the company sector. If one valued the assets of companies according to this principle one would, no doubt, find many companies making very much smaller profits than they imagine they are making at the moment. Some could be making negative profits. I see that the Chairman of ICI, in his statement yesterday, made an estimate of the reduction in profits which would result from their assessment on a basis different from the company's traditional methods. All this is common ground. It is common ground that the present calculation of profits may yield illusory figures.
Nevertheless, in considering any such proposal as this amendment many questions have to be settled. Some of the questions involved in deciding what inflation accounts should look like have been raised in the debate. No doubt, the fact that there are so many questions to be answered led the Conservative Government to invite the Sandilands Committee on Inflation Accounting to study the matter further.
One of the problems is raised in the amendment itself—what index would it be suitable to use as the basis of such accounts? The hon. Member for Cornwall, North suggests the retail price index,

and has received a certain amount of support for his proposal. It is a matter for consideration what type of index would be appropriate, or, indeed, whether one index alone would be appropriate or whether we might need to have more than one index to produce this type of accounts. As the Committee knows, following our debate yesterday on savings, I have recently been considering the recommendation of the Page Committee about an index-linked bond.
The Page Committee has made a study of index linking in other countries. For example, it has observed that there is a great deal of index linking in Israel, but that has not, apparently, had any effect on Israel's remarkable rate of inflation. The linking in Israel is to the retail price index, and the committee went on to notice—this should interest the hon. Member for Cirencester and Tewkesbury, who, though normally afraid of Government intervention, apparently agrees with this type of intervention—that one consequence of linking to the retail price index is that Governments begin interfering deliberately with the index.
The retail price index is a highly politically manipulable index. The Page Committee, in considering that fact, decided, therefore, that perhaps it would not be suitable for the purpose, and it sought for other kinds of index which might be appropriate. It came up with one which, I believe, is not so politically manipulable—the gross domestic product deflator. There is the question whether this is a suitable index. Replacement costs might frequently be a better index for the purpose. These are all questions which the Sandilands Committee will presumably consider.
Some increases in value by reference to the retail price index are genuine increases in value. For example, the increase recently in the price of oil represents a real increase in the value of oil. But how does one bring that fact into one's account? A company's monetary debts are also affected by inflation. They can go down in real terms, but how does one bring that fact into the accounts?
There is a series of serious and difficult problems in this area on which we need advice—and not merely the advice which has so far been obtained from the


various bodies which have considered the matter—before we can come to any conclusion upon it.

7.30 p.m.

Mr. Nigel Lawson: The problems which the right hon. Gentleman is putting forward now arise only if there is a separate index for each commodity. If there is one single index—say, the GDP deflator—all these problems disappear.

Mr. Dell: It depends what the index is. Even if we chose the GDP deflator I am not sure that it would solve the problems in producing inflation accounts. That is the kind of question which has to be considered and on which we are looking for advice. I hope the advice which is given will carry general acceptance when it is available. This is the problem which has to be decided. All that I can say now is that the Government are not persuaded that we are in the position to accept an amendment such as this—and for a further reason which I shall come to presently.
In the meantime it has to be borne in mind that, in a sense, companies benefit from inflation. For example, there is a delay in their payment of tax. An average of 18 months from the period in which the tax is earned is a gain to a company. In Brazil—the example which has been cited by two hon. Members—tax debts are indexed. If one followed the course of which Opposition Members are becoming so persuaded presumably we should have to index tax debts as part of the total machinery. This would not be entirely to the benefit of companies. It is, perhaps, one reason why we cannot be sure of the effect on company taxation in adopting such a system.
Here I come to one of the fundamental points in the discussion. It was made clear to the Sandilands Committee when it was set up that it could not be assumed that inflation-proofed accounts would be suitable for tax purposes. This is another matter that we shall have to look at when the proposals come forward, assuming that they find general acceptance. It may be necessary to have a different or amended basis for tax purposes.
After the Sandilands Committee has reported the Government will have to consider what for tax purposes is a suit-

able accounting basis that will be fair as between companies, as between companies and other traders, and as between companies and the rest of the economy. But we must have the Sandilands Committee's Report first.
The hon. Member for Wycombe (Sir J. Hall) asked when the Sandilands Committee is expected to report. I am afraid that I have to disappoint the hon. Gentleman. My information is that it is likely to be far more than a few months before the committee reports. It may be more like 18 months. This is a matter which we can discuss with the committee. However, it has fairly serious problems to consider before it reports. It would be of greater value for its report to take a little longer and be persuasive, than for the committee to be hurried.

Mr. Cope: I am not sure whether I have followed the right hon. Gentleman correctly. Is he saying that the Government accept the principle of the amendment and that it is merely a matter of feeling their way through, with the aid of the Sandilands Committee, to the proper way of implementing it? If so, that is fairly important. It seems to be behind what the right hon. Gentleman is saying.

Mr. Dell: No. I am keeping a completely open mind on this proposal. 1 am saying that we are waiting for a report from the Sandilands Committee which we shall then have to consider both as regards its proposals in relation to inflation accounting as also as regards the relevance of the report for the basis of the tax liability of companies.
I am afraid that I cannot give the hon. Member for Wycombe the assurance that the Sandilands Committee will report in a few months. It will take longer than that. However, it is better that the report should be persuasive and carry with it the companies and those concerned with these matters, rather than that it should be hurried in the way that the hon. Gentleman suggests.

Sir John Hall: I appreciate the difficulty of accepting the amendment in this form because of the problems of deciding which form of inflation accounting should be used and whether one or several indices should be used. Nevertheless, I


hope that the right hon. Gentleman will at least examine the possibility of hastening the Sandilands Committee's report and that he will inquire into the possibility of bringing it forward much sooner than in 18 months or two years. This is an urgent problem. The sooner that we can come to a decision about it the better.

Mr. Dell: Certainly I am ready to look into whether the report can be speeded up. However, my present information is that it is likely to be about 18 months.

Question put, That the amendment be made: —

The Committee divided: Ayes 24, Noes 239.

Division No. 27.]
AYES
[7.37 p.m.


Beith, A. J.
Morgan, Geraint
Wainwright, Richard (Colne Valley)


Biggs-Davison. John
Nicholls, Sir Harmar
Wigley, Dafydd (Caernarvon)


Grimond, Rt. Hn. J.
Redmond, Robert
Winstanley, Dr. Michael


Hooson, Emlyn
Ross, Stephen (Isle of Wight)
Winterton, Nicholas


Howells, Gerainl (Cardigan)
Stanbrook, Ivor



Johnston, Russell (Inverness)
Steel, David
TELLERS FOR THE AYES:


Langford-Holt, Sir John
Taylor, Edward M. (Gl'gow, C'cart)
Mr. John Pardoe and


Lawson. Nigel (Blaby)
Thomas, D. E. (Merioneth)
Mr. Clement Freud.


Maxwell-Hyslop. R. J.
Thorpe, Rt. Hn. Jeremy



Meyer, Sir Anthony
Tyler, Paul





NOES


Allaun, Frank
Doig, Peter
Janner, Greville


Archer, Peter (Warley, West)
Dormand, J. D.
Jay, Rt. Hn. Douglas


Armstrong, Ernest
Duffy, A. E. P.
Jenkins, Hugh (W'worth, Putney)


Ashley, Jack
Dunnett, Jack
Johnson,James (K'ston upon Hull.W)


Ashton, Joe
Dunwoody, Mrs. Gwyneth
Johnson, Waller (Derby, S.)


Atkins, Ronald (Preston, N.)
Eadie, Alex
Jones, Barry (Flint, E.)


Atkinson, Norman
Edelman, Maurice
Jones, Dan (Burnley)


Bagier, Gordon, A. T.
Edge, Geoff
Jones, Alec (Rhondda)


Barnett, Guy (Greenwich)
Edwards, Robert (W'hampton, S.E.)
Judd, Frank


Barnett, Joel (Heywood &amp; Royton)
Ellis, John (Brigg &amp; Scunthorpe)
Kaufman, Gerald


Bates, Alt
Ellis, Tom (Wrexham)
Kelley, Richard


Baxter, William
English, Michael
Kilroy-Silk, Robert


Bennett, Andrew F. (Stockport, N.)
Evans, Fred (Caerphilly)
Kinnock, Neil


Bidwell, Sydney
Evans, loan (Aberdare)
Lambie, David


Bishop, E. S.
Evans, John (Newton)
Lamborn, Harry


Blenkinsop, Arthur
Ewing, Harry (St'ling.F'kirk&amp;G'm'th)
Lamond, James


Boardman, H. (Leigh)
Faulds, Andrew
Latham, Arthur (CityofW'minsterP'ton)


Booth, Albert
Fernyhough, Rt. Hn. E.
Lawson.George (Molherwell&amp;Wishaw)


Boothroyd, Miss Betty
Fitch, Alan (Wigan)
Leadbitter, Ted


Boyden, James (Bishop Auckland)
Flannery, Martin
Lee, John


Bradley, Tom
Fletcher, Ted (Darlington)
Lestor, Miss Joan (Eton &amp; Slough)


Broughton, Sir Alfred
Foot, Rt. Hn. Michael
Lever, Rt. Hn. Harold


Brown, Hugh D. (Glasgow, provan)
Ford, Ben
Lewis, Ron (Carlisle)


Buchan, Norman
Forrester, John
Lipton, Marcus


Buchanan, Richard (G'gow,Springbrn)
Fraser, John (Lambeth, Norwood)
Lomas, Kenneth


Bulier.Mrs.Joyce (M'gey,WoodGreen)
Freeson, Reginald
Loughlin, Charles


Callaghan, Jim (M'dd'ton &amp; Pr'wich)
Garrett, John (Norwich, S.)
Loyden, Eddie


Campbell, Ian
Garrett, W. E. (Wallsend)
Lyons, Edward (Bradford, W.)


Cant, R. B.
George, Bruce
McEIhone, Frank


Carmichael, Neil
Golding, John
MacFarquhar, Roderick


Carter, Ray
Gourlay, Harry
McGuire, Michael


Castle, Rt. Hn. Barbara
Graham, Ted
Mackenzie, Gregor


Clemitson, Ivor
Grant, George (Morpeth)
Maclennan, Robert


Cocks, Michael
Grant. John (Islington, C.)
McMillan, Tom (Glasgow, C.)


Cohen, Stanley
Griffiths, Eddie (Sheffield, Brightside)
McNamara, Kevin


Coleman, Donald
Hamilton, James (Bothwell)
Madden, M. 0. F.


Colquhoun, Mrs. M. N.
Hamilton, William (Fife, C.)
Mahon, Simon


Concannon, J. D.
Hamling, William
Mallalieu, J. P. W.


Conlan, Bernard
Hardy, Peter
Marks, Kenneth


Cook, Robert F. (Edinburgh, C.)
Harper, Joseph
Marquand, David


Caigen, J. M. (G'gow, Marynili)
Harrison, Walter (Wakefield)
Marshall, Dr. Edmund (Goole)


Crosland, Rt. Hn. Anthony
Hattersley, Roy
Mayhew,Christopher (G'wh,W'wch.E)


Cryer, G. R.

Meacher, Michael


Cunningham,G. (lsl'ngt'n,S&amp;F'sb'ry)
Healey, Rt. Hn. Denis
Mellish, Rt. Hn. Robert


Cunningham,Dr.JohnA. (Whiteh'v'n)
Heffer, Eric S.
Mikardo, Ian


Davidson, Arthur
Hooley, Frank
Millan, Bruce


Davies, Denzil (Llanelli)
Horam, John
Miller, Dr. M. S. (E. Kilbride)


Davies, Ifor (Gower)
Huckfield, Leslie
Milne, Edward


Davis, Clinton (Hackney, C.)
Hughes, Rt. Hn. Cledwyn (Anglesey)
Mitchell, R. C. (S'hampton, Itchen)


Deakins, Eric
Hughes, Robert (Aberdeen, North)
Morris, Alfred (Wythenshawe)


Dean, Joseph (Leeds, W.)
Hughes, Roy (Newport)
Morris, Charles R. (Openshaw)


Delargy, Hugh
Hunter, Adam
Morris, Rt. Hn. John (Aberavon)


Dell, Rt. Hn. Edmund
Irving, Rt. Hn. Sydney (Dartford)
Moyle, Roland


Dempsey, James
Jackson, Colin
Mulley, Rt. Hn. Frederick




Murray, Ronald King
Roper, John
Tierney, Sydney


Oakes, Gordon
Rose, Paul B.
Tinn, James


Ogden, Eric
Ross, Rt. Hn. William (Kilmarnock)
Tomney, Frank


O'Halloran, Michael
Rowlands, Edward
Torney, Tom


O'Malley, Brian
Sandelson, Neville
Tuck, Raphael


Orbach, Maurice
Selby, Harry
Urwin, T. W.


Ovenden, John
Shaw, Arnold (Redbridge, lllord, S.)
Varley, Rt. Hn. Eric G.


Owen, Dr. David
Sheldon, Robert (Ashton-under-Lyne)
Walnwright, Edwin (Dearne Valley)


Padley, Walter
Shore, Rt. Hn. Peter (S'pney&amp;P'plar)
Walden, Brian (B'm'ham, Ladywood)


Palmer, Arthur
Short, Rt. Hn. E. (N'ctle-u-Tyne)
Walker, Harold (Doncaster)


Park, George (Coventry, N.E.)
Silkln, Rt. Hn. John (L'sham.D'ford)
Walker, Terry (Kingswood)


Parker, John (Dagenham)
Silkln,Rt.Hn.S.C. (S'hwark,Dulwlch)
Watklns, David


Parry, Robert
Sillars, James
White, James


Pavitt, Laurie
Silverman, Julius
Whitlock, William


Peart, Rt. Hn. Fred
Skinner, Dennis
Willey, Rt. Hn. Frederick


Perry, Ernest G.
Smith, John (Lanarkshire, N.)
Williams, W. T. (Warrington)


Phipps Dr. Colin
Snape, Peter
Wilson, Alexander (Hamilton)


Prescott, John
Springs, Leslie
Wilson, William (Coventry, S.E.)


Price, Christopher (Lewlsham, W.)
Stewart, Rt. Hn. M. (H'sth, Fulh'm)
Wise, Mrs. Audrey


Price, William (Rugby)
Stoddart, David (Swindon)
Woodall, Alec


Radice, Giles
Stott, Roger
Woof, Robert


Richardson, Miss Jo
Strang, Gavin
Wrigglesworth, Ian


Roberts, Albert (Normanton)
Strauss, Rt. Hn. G. R.
Young, David (Bolton, E.)


Roberts, Gwilym (Cannock)
Summerskill, Hn. Dr. Shirley



Roderick, Caerwyn E.
Swain, Thomas
TELLERS FOR THE NOES:


Rodgers, George (Chorley)
Thomas, Jeffrey (Abertillery)
Mr. Thomas Cox and


Rooker, J. W.
Thome, Stan (Preston, S.)
Mr. James A. Dunn.

Question accordingly negatived.

Clause 7 ordered to stand part of the Bill.

Clause 9 ordered to stand part of the Bill.

Clause 10

PAYMENTS IN ADDITION TO ADVANCE CORPORATION TAX DUE IN FINANCIAL YEAR 1974

Mr. David Mitchell: I beg to move Amendment No. 22, in page 6, line 38, after 'company', insert
'not being a company paying the small company rate of corporation tax'.
The purpose of the clause is to make a company give the Government an interest-free loan of the same amount as half its advance corporation tax. I say "interest-free"; of course, it is interest-free to the Government but it is not interest-free to the company concerned. Almost certainly it will have to go to its bankers and pay 15 per cent, interest on its overdraft.
The effect of the amendment is to exempt the smaller business from this impost. I speak as the voice of countless small businesses throughout the country. As a small businessman I should declare my interest. It may help the Committee to have someone intimately connected with the practical problems of running a small business moving the amendment.
The real problem that we are debating is the restriction on growth of the smaller

business sector imposed by excessive taxation leading to a shortage of working capital.
The background is that for a long time the special problems of small businesses were not recognised, or were insufficiently recognised. The previous Labour Government—I give them full credit—set up the Bolton Committee to look into the matter. One of the most interesting and valuable points highlighted in its report was that one of the criteria of a small business was that it was financed largely out of retained profits.
My right hon. Friend the Member for Altrincham and Sale (Mr. Barber), when Chancellor of the Exchequer, made the first major step forward to help the smaller business community by introducing the smaller business corporation tax rate in his 1972 Budget.
I had hoped to see in the Chief Secretary to the Treasury a friend of small businesses. Indeed, I remember how, when in opposition, he recognised the important contribution that they make to this country's economy and recognised the need to encourage investment in them. I was particularly disappointed to find that this Budget, instead of helping them, has dealt a savage blow to many of them. There is a difficult situation facing such businesses, and the Budget makes it worse. As the Financial Secretary will be replying to the debate, I hope that he will be in a mood to accept the amendment, which it will be so reasonable and so inexpensive for him to accept.
The problem faced by small businesses is, quite simply, one of insufficient money being available to expand at present. I advance half a dozen reasons why the situation is as severe as it is at present.
First, there is the aftermath of the three-day working week earlier this year, for which the miners were responsible. At the time of the three-day working week companies were paying out virtually their full running costs. But it is only now, when the goods they have sold have to be paid for and when their customers have taken credit, that the real shortage of cash is making itself felt.
Many companies, on top of that, are finding that their profits are restricted and, indeed, in some cases cut, by the recent directions which have been issued by the Government in that connection. This again has exacerbated the shortage of cash. There are substantial increases in rates and there is a coming increase in National Health Service contributions, all of which require more cash in the businesses.
At present, we also have inflation, which means that a company having the same turnover and volume of sales requires more money for raw materials, work in progress and stocks, and more money outstanding waiting for its customers to pay for the goods which it has supplied.
When, on top of that, one has the sort of growth that we had in the economy last year—a welcome increase in production throughout our economy—it exacerbates the problem, for to have a greater volume of production requires even more money tied up in raw materials, in work in progress and in stock sitting on the shelf, and even more in money due from one's customers. On top of that, we have the factor of inflation accounting and the fact that corporation tax, as the previous debate has shown, is often levied on illusory profits, and often means, in the case of many companies, that the Chancellor is engaged in nothing more nor less than asset stripping.
There are six solid reasons why companies need more working capital. Large quoted companies may—I say "may", advisedly—go to the Stock Exchange to raise more working capital. The small business, by definition—the company that finances itself by plowing back its profits

—is unable to do that. It is at this precise moment that the Chancellor has chosen to make the problem worse. On the one hand, businesses, especially small businesses, need more working capital. On the other hand, the Chancellor jacks up corporation tax by an extra 2 per cent, and, in addition, worsens the situation by this new impost in the clause.
When speaking earlier in our debates today, the Paymaster-General talked about the need for investment in British industry. For small businesses nothing could be more important, for the whole future of British industry rests on the ability of small businesses to grow into large businesses. They are the seed bed of our future prosperity. The seed bed needs to be cultivated, cared for and succoured. At this point, the Chancellor is making the cash-flow problems seriously worse.
Therefore, as it will cost the Chief Secretary so little, I hope that he will feel able to accept this simple, straightforward amendment.

Mr. Bruce-Gardyne: I rise to offer briefly all the support that I can to my hon. Friend the Member for Basingstoke (Mr. Mitchell) in the amendment that he has moved so attractively and so persuasively.
I like to think that the Chief Secretary will in due course assure the House that he is able to accept the amendment. As my hon. Friend reminded the Committee, the hon. Gentleman, in his days in Opposition, emerged from his chrysalis as a great champion of the small companies. It was a unique position, because if ever the Labour Party has aimed its indiscriminate fire against a particular sector of the economy over the years, it is the small companies. We shall now be able to judge whether the words that he used to utter when in Opposition are to be backed up by deeds tonight, or whether, as many of us fear, it was all a load of old hypocrisy, after all. If the hon. Gentleman rejects the amendment, that is what it is.

Mr. Dennis Skinner: We shall be in the Lobby.

Mr. Bruce-Gardyne: The hon. Member for Bolsover (Mr. Skinner) will, I am sure, have a fascinating contribution to make to the debate in due course, to which we shall listen with great interest.


We have now reached Clause 10, which I suppose comes very much into the category of those aspects of the Budget which the Chancellor described in the Budget Statement, speaking of the public sector financial deficit and the borrowing requirement, as follows:
The best way to ensure that this deficit is cut sufficiently without excessive cuts in demand is to concentrate tax increases on those who are less likely to reduce their consumption when their taxes go up…But the richer you are, the less you need to cut your standard of life when your taxes go up; you are more likely to meet the increase in your taxes simply by drawing on your bank balance."—[OFFICIAL REPORT, 26th March 1974: Vol. 871, c. 307.]
In other words, the Chancellor made it clear that his intention was to tackle the seed corn. That is precisely what the clause is about.
In summing up the Budget debate, the Chancellor claimed that the provisions of this clause would have
little effect on close companies, which distribute very little of their profits".—[OFFICIAL REPORT, 1st April 1974; Vol. 871, c. 1007.]
The truth is, as the Chancellor ought to be aware but may not be—although the Chief Secretary certainly is—that although my right hon. Friends in the previous Government did a great deal to dismantle some of the more criminally damaging aspects of the Finance Act 1965 against the private companies, it still remains the case that the threat of surtax direction hangs over their heads. They are therefore under permanent pressure to increase their contributions. It is simply adding to their miseries to devise in Clause 10 an obligation upon them to add 50 per cent, to their advance corporation tax in respect of distribution which they may be pressurised by the Inland Revenue to make. As my hon. Friend the Member for Basingstoke pointed out, the private company is not in the position of the public company to ease its liquidity problems by approaching the market for additional capital.
8.0 p.m.
The Chancellor of the Exchequer in his much-commented upon speech to the CBI the other night is reported as having said, among other things:
I am sure you will not complain if we do what we can to ensure that profits are ploughed back into industry, which produced them.…

The point about the private company is that it has every need to plough back its profits because it has no other possible source of resources for future investment, and in that respect it is in a different category from the public company. Yet in so far as it is obliged by the Inland Revenue to make distributions for fear of receiving a surtax direction, it is now to have lumped on top of it an obligation to pay an extra 50 per cent, on ACT in advance. As my hon. Friend pointed out, we can but guess at the effect which this will have on the liquidity of private companies in the months ahead. 
I believe that the importance of the health of the private company sector is fundamentally underestimated in one particular respect. I have argued this point during debates on previous Finance Bills when appealing for a differential system for corporation tax for the private company, during the lifetime of the previous Government. I have referred to the vital importance of the small companies in many of the more far-flung areas, particularly many parts of Scotland, where a high proportion of employment is provided in many areas, such as mine, by private companies which are the only companies with genuine local identity and local roots.
Clause 10 is one more attempt by the Labour Government to destroy the identity of those companies, to drive them into the arms of the larger public companies because, under the tax regime devised by the Government, they cannot continue to finance their future investment needs. Nothing could be more damaging to the regions of the country, over which the Labour Party sheds crocodile tears when unemployment is liable to rise in those areas. If the Labour Party would look at the danger which its mayhem in the fiscal system does to these areas through proposals such as Clause 10, it might make a more positive contribution than it has to date to the well-being of many parts of the country, such as the part of Scotland which I represent.
In the light of the Chancellor's remarks at the CBI meeting, which to my mind clearly indicated that even he has recognised the damage the Budget is to do to the liquidity of the company sector as a whole and the risks he is taking regarding falling investment, I hope that the


modest concession for which my hon. Friend has asked in the amendment is one which the Chief Secretary is prepared to concede.
I must confess that I have never been an unlimited admirer of the small company rate. I believe that we should instead strike a difference between the private company and the publicly-quoted company, and try to draw a line. Nevertheless, we have here a basis for dealing with the problems of a great many of the smaller companies, and if the Chief Secretary were to accept the amendment the cost to the Revenue would be minimal. It is no good the Chief Secretary trying to pretend that the amendment would have a dramatic effect on the level of the borrowing requirement, because in any case he is merely claiming forward money which would be due in due course, but it would make a significant difference to the liquidity of the private sector. I hope that the Chief Secretary will say what he said during his years in Opposition and accept the amendment.

Mr. Anthony Grant:: As we are all declaring interests, I must tell the Committee that I am not a small businessman, I am not even a big businessman, but I claim an interest in that in the previous Government I was the Minister with special responsibility for small firms, and in that capacity I followed my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley).
This is a vital amendment which puts the Government to the test whether they support what I believe is one of the most vital sectors of our economy. When I had responsibility for small firms I found that those firms had a number of pressing problems. Many of the problems were outlined by the Bolton Report, and the previous Government took action on the overwhelming majority of those problems. They included those involving disclosures—which was a particularly difficult problem, upon which we took remedial action—form-filling and bureaucracy—upon which we also took action— and corporation tax—where we removed the worst vices of short fall and close company legislation.
Nevertheless, last year the small company sector, or an important part of it,

found the burden of corporation tax particularly oppressive precisely because those companies were so different from the large companies which were able to raise money from the money market. The small company can raise money for future expansion only out of profits, after taxation has been paid or, if it is lucky, from the banking sector, where interest rates are high. But basically the small company has to finance itself from its own profits earned after taxation.
Undoubtedly the rate of corporation tax was of great concern, and amendments were moved last year by some of my hon. Friends during consideration of the Finance Bill, but unfortunately, for reasons explained by my right hon. Friend the then Chancellor, he was unable to accept the amendments at that stage. Nevertheless, there was some hope that had the previous administration continued it would have been possible to take action, in perhaps what would now have been a Conservative Budget.
But what has happened is the exact opposite. Far from reducing corporation tax this year—as we had hoped to do for the small companies—the Chancellor of the Exchequer, in the Budget, has increased it. He then pretended that there was a decrease by making the tax rather smaller for the smaller companies, but it is an increase by any standards, whereas these companies require a decrease in order to help finance themselves. The Government have also acted in a particularly sneaky manner by seeking in this offensive clause to get money in advance from those people who are least able to pay it.
Therefore, we must carefully consider what the proposals will mean for small companies. These companies are asked to increase investment. The Government are always prattling about more investment being required. How can they expect firms, particularly in the small sector, to increase their investment if they will have to bear substantial extra costs for steel, coal, electricity, postage, rail freight and a whole range of other items, with a further burden of corporation tax at the same time? Unless the Government accept the amendment, they will be striking at one of the most vital sectors of our economy, one on which they must depend.
I am pleased to see the Under-Secretary of State for Industry on the Government Front Bench, because I believe that he is my successor with responsibility for small firms. Unlike some of his colleagues, he has some experience of small firms, and I believe that his heart is in the right place, although we shall put him to the test. The trouble he will find is with the chaps next to him. I hope very much that he will whisper in the ear of the Chief Secretary about the importance of the small firms.
The Under-Secretary will have all the information now, because he should have seen nearly all the organisations dealing with small firms, and he will know the burden being placed upon them by the clause. I hope that he has conveyed the message loud and clear to the Chief Secretary. He will get no joy from any of his other colleagues, because they are manifestly not interested in small firms. The total lack of interest is shown by their absence from the Chamber and the lack of speeches on the subject by Labour Members. Therefore, we rely on the Under-Secretary's having twisted his hon. Friend's arm.
One reason why there is such a lack of interest in small firms is that industrial relations are infinitely better in them than in large firms. The large trade unions, to which the Labour Party is hog-tied— its members yap like Pavlov's dog when the large trade unions whistle—cannot get their clammy hands on small firms.
Unless the Chief Secretary responds favourably to this reasonable amendment, he will be striking a vital sector of our economy at its grass roots. If he believes in a mixed economy, as I know he does, he cannot depend solely on the nationalised industries and one or two large companies. He, above all, should recognise the importance of having a large, healthy and flourishing small sector to back them up.

Mr. John Loveridge: I am glad to support the amendment so ably moved by my hon. Friend the Member for Basingstoke (Mr. Mitchell). I hope very much that the Government will pay heed to his modest request on behalf of small businesses.
Small companies have greater difficulties over liquidity matters than do large firms. The amendment would give some

relief to firms up to the present profit figure of£15,000 a year and the marginal figure above that. It is just these smaller firms that find their cash flow figures under threat. They also find it hardest to foresee and manage the rapid month-to-month fluctuations that arise in seasonal business. They do not all have the highly specialised skills in their small bookkeeping departments to make precise and detailed forward analyses from month to month, although they should do as much as they can, as all firms should, to keep such figures.
Small firms often rely on overdrafts to cover the rises and falls of the seasonal business, but there must be limits to a firm's reliance upon short-term funds. Such funds may not always be readily, or even wisely, renewed.
1 accept that there is some difficulty in finding exact figures or statistics on the need of the smaller firm for greater liquidity than the larger firm. It is not an easy matter to research into, but common sense suggests that there is much less margin of error for the smaller firm and that any sound management of such a business should be cautious over its cash flow position. Any unevenness of cash affects small companies particularly.
8.15 p.m.
The Accountant of 2nd May wrote:
The liquidity problems of companies are likely to be exacerbated in uneven fashion when the due date of the additional advance corporation tax arrives on September 1st
and went on—
For some this will represent a fortuitous and unforeseeable consequence of choosing a dividend payment date in the first three months
of the year.
Many will be hard hit. particularly in the month of January. Will the Government give us estimates of how much extra outflow will have to be met by firms in that month? Will they have to find a quarter more, a half more, or even double? There is no room in the small business for mistake estimates, particularly due to unforeseeable Government measures.
In those circumstances, any measures which further damage the cash flow position—and the clause would do serious damage—must put at risk future expansion and investment in projects requiring enterprise and initiative. Hoped-for


growth which has any risk to it will be postponed.
Small firms are already hard hit in respect of their liquidity in other ways. First, they need to rebuild their stocks after short-time working. Often those stocks must be rebuilt at very high prices, due to the sharp rise in the purchase price of imported materials.
Secondly, they are hit by high interest rates on borrowed money.
Thirdly, they are hit by tightening lines of credit from bigger companies, themselves pressed to pressure the smaller firms for payment because they are affected by the fear of the possible successive triggering off of threshold agreements.
Fourthly, they are hit by the greater difficulties that the medium-sized part of the smaller company sector must have in obtaining new sources of funds. When they reach the limit of short-term loans for overdraft arrangements they are not in the same position as the big firms, which may have public quotations or arrangements with finance houses. They cannot readily convert short-term loans into long-term loans.
That was recognised in the Bolton Report in 1971, which said that
small firms have suffered and still suffer a number of genuine disabilities, by comparison with larger firms, in seeking finance from external sources.
Earlier this year the Financial Times gave the warning that there are
signs of a distinct tightening of trade and credit, with small companies first (as usual) to feel the pinch.
It is widely recognised that the smaller company is the first to feel the pinch when liquidity is short. Why force this sector of the economy to be dependent to an even greater degree on borrowed money? Surely we should try to let them reinvest as much as possible of their retained earnings. Much of the Government's own policy seems to be directed towards that end. Why not continue that part of the Government's policy by accepting this modest amendment? It is an amendment that will not cost a great deal but which will help to even out the uneven flow of liquidity for the smaller firms.

Mr. Robert Redmond: I am grateful for the opportunity to take

part in this debate. The welfare of small firms has been my interest since being elected to the House. I was glad to hear my hon. Friend the Member for Harrow, Central (Mr. Grant) draw attention to the source of the speeches. I well remember that when I had some Private Members' time and opened a debate on small businesses my hon. Friend had the job, as Minister, of replying. On that occasion, too, the whole debate came from the Conservative benches.
I must say a special word of welcome to my hon. Friend the Member for Basingstoke (Mr. Mitchell), who is now on our Front Bench. He is the Chairman of the Conservative Small Businesses Committee. We are now able to see the work that it does.
I wish to declare a former interest, my experience as the managing director of a small firm in the engineering industry. It employed about 120 people. It was driven into a take-over by the Labour Party's Budget in 1965. That took me away from small firms. That was something that I resented very much.
I think also of the many small firms in Bolton I visit from time to time. It might be said that I have a special relationship with those firms. The directors seem to regard me as rather a strange animal—the MP who knows what it is like to sit in the boardroom of a small business wondering where next week's wages are coming from and how they will be paid. They do not seem to think that many MPs have that sort of experience. I hope that this evening's debate will show them where those Members are.
Anything that will help to improve the liquidity position of small firms should be given a high priority. The small firms sector is vitally important to the economy and if we can help it without costing the Exchequer a great deal we should do so. The small firms are squeezed in all directions, and not least by the large firms, their customers, who take extended credit at a time of dear money, thus making life difficult. Small firms are not normally firms that pay large dividends, but there are occasions when it is necessary for them to do so. Sometimes, as has been mentioned by


my hon. Friend for South Angus (Mr. Bruce-Gardyne), there is the need to avoid surtax direction. More particularly, it may be necessary to pay a dividend to the widow of the founder of the business. It might be the widow's sole income. She may be totally dependent on the dividend provided by the present directors. That sort of business is driven into the ground if it is over-taxed. Dividends are not paid by small firms for fun.
I doubt whether the amendment would cost much money. I hope that the Chief Secretary will tell us exactly what it will cost. If he does not know, he should accept the amendment without further demur. I know that his boss, the Chancellor of the Exchequer, is in favour of profits when he is at dinner with the CBI, but let him relent a little and allow small firms to keep some of their profits. I hope sincerely that we shall have Government acceptance of the amendment.

Mr. Kenneth Lewis: I am disappointed to see the right hon. and learned Gentleman the Attorney-General leave the Government Front Bench. I thought that he would tell his hon. Friend the Chief Secretary how he could accept the amendment. I congratulate my hon. Friend the Member for Basingstoke (Mr. Mitchell). He has taken an interest in this subject for a long time. I thought that he put his case very effectively. Advance corporation tax is an imposition on all businesses. If we are to have another Budget in the autumn the Government should realise by then that they are taking too much money away from business and that they will have to readjust corporation tax or take some other action. Advance corporation tax is even more of an imposition upon small firms.
For what is the money used? This Government will take money away from the small business—and not just corporation tax but advance corporation taxes— to pay for the losses of the nationalised industries and to pay for their own extravagances in their own sector. They intend to take from the prosperous area of business to pay for the losses of the unprosperous areas. That is in keeping with the way in which they run the

economy. They are also going to use the money to pay for some of the subsidies that go to the larger businesses, such as the large corporations that we hear the Government talking about in terms of readjustment and subsidies. The subsidies will come from the additional taxation of the small businesses which can ill afford to provide the money.
I find it interesting that the Bill, in page 7, line 1, reads,
if the amount of the payments made under this section exceeds the amount of that liability, the excess shall be repaid to the company.
Thank you for nothing! What a wonderful offer! If the Treasury or the Inland Revenue decide that they have taken too much they will pay it back. I do not suppose that they will pay interest. They will not make up for the fact that a company has lost the use of the money. They will not make up for the fact that a company has been unable to expand because the Treasury has had the money which it should not have had in the first place.
However, it will be paid back. It is not said when it will be paid back. Presumably a company will get it back when next year's tax is due. Perhaps the Treasury will keep it for a little longer. It is usually behind in the repayment of tax but not in its collection. That will cause the small companies even more difficulties.
Perhaps the Chief Secretary will say what he proposes to do about that situation. In his previous guise he was an accountant. Therefore, he has spent much of his time trying to get round the Inland Revenue on behalf of his clients. I am sure that the hon. Gentleman's heart is in the right place and that he would like to concede this amendment.

Mr. Redmond: His seat is in the wrong place.

Mr. Lewis: That may be so, and he is
surrounded by the wrong people. They are tugging at his coat tails and telling him that he dare not concede this amendment. If he cannot concede, may I try to help him by suggesting that he uses his head. We do not often get heads used by Government Members. This is a Government who act more from the heart, that being usually in the wrong place, than from the head, that being in the right place.
8.30 p.m.
We know that the hon. Member has a head. He knows about business and industry. I have no doubt that some of his former clients, his best ones, were those who operated small businesses. He should, perhaps, bear in mind that he may need them quite shortly because he may have the distinction of having been Chief Secretary for the shortest-ever period. I appeal to him to use his judgment. If he persists with this course it will add an additional burden to the work of accountants and to those in the Inland Revenue who are already overburdened.
Why ask the Inland Revenue to start calculating tax in advance when there may be no justification for the collection of that tax because the profits are not there? The hon. Gentleman must know that this is a very good invitation to a company to make a loss. It is not difficult for a business to make a loss if it wishes to do so. In present circumstances it is almost inevitable that profits will be down. The hon. Gentleman knows that the Treasury will collect less in any case. If profits are down, in certain cases it may not be difficult to make a loss.
If the hon. Gentleman and his hon. Friends are to collect tax in advance, making a guess at what the profit might be, the Treasury could lose out in the long run. I believe that that is how the situation will be seen in 1975 when whichever Government are in power looks back on the situation. This is an invitation to small companies to stand still. If they go ahead, not only will they pay more tax but they will have to pay an additional advance tax. They will say, "Let us have a year when we do not expand." There will be some companies which will not be able to expand because of the squeeze resulting from the Budget. Added to this there will be other companies which could expand but which will not do so because they realise that they will be clobbered if they do. They will ask themselves, "Why should we be clobbered if we can avoid it?"
Such companies are in a position to avoid that kind of clobbering. I have a small business. The small business sector employs numbers of people completely out of relation to the size of the individual companies. If the Government want to maintain full employment in this
sector they must encourage expansion and discourage restrictions which will induce small businesses to begin shedding staff. This clause is inviting smaller profits, reduced revenue and redundancies. I hope that the hon. Gentleman will pay attention to the arguments that have been advanced against it.

[Mr. HAROLD GURDEN in the Chair]

Mr. Cope: it is nice for me to be able to take part in this debate, because I have followed the fortunes of small businesses in politics for some years. I joined my hon. Friend the Member for Croydon, North-East (Mr. Weatherill), who is now the party's deputy Chief Whip, in writing a pamphlet on small businesses some years ago. I am glad to say that the title of that pamphlet—"Acorns to Oaks"—was taken up at that time. I am also glad to see, on looking back, that the pamphlet reads like a summary of the Bolton Committee's Report. This was almost entirely due to the work of my hon. Friend, but I did play a small part in the work.
In cash terms, this clause raises nothing. It merely brings forward a payment. In these inflationary times money now is worth more than money some time in the future. But it also means that the Treasury has the use of that money, instead of the businesses from which it has been taken. So it is at the same time another example of the Treasury's using inflation to its own advantage. But it is, in addition, a way of improving the liquidity of the Government at the expense of the liquidity of the firms from which this money is taken.
My hon. Friend the Member for Harrow, Central (Mr. Grant) described it as a sneaky way of doing this. He was quite correct. After all, the Government can, because they are the Government, borrow more cheaply than can large companies; and large companies can borrow more cheaply than small ones can; so in that respect the imposition is even greater on the small company than on the large one. We shall be discussing this aspect if the amendment concerned with bank borrowing is called.
The effect of the clause in this year is very great, on all businesses. We on the Opposition side of the Committee at any rate cannot see how large it is at the moment on small businesses, but


the total is£315 million in this year, which is far more than is being raised by the increase of 2 per cent, in corporation tax, even in the first year. It is more than twice the amount raised by the increase in corporation tax.
The real imposition, however, in the long term depends on the interest rate one assumes is necessary in this case. The real imposition must be somewhere around£20 million, so that the cost of this amendment for small businesses, in terms of the interest payable or not payable, cannot possibly be more than£10 million at the very outside. How much better it would be to spend the£10 million—if it is that much—as we suggest, rather than put forward the new clause about trade unions, which we are to debate later. It is a once-for-all extraction of liquidity from firms small and large.
A relevant question in this debate is why we should, why the Government should, do anything at all for small businesses, or businesses small by comparison with large businesses. I believe on the whole the economic world at the moment is loaded against small businesses. There are some things small businesses, by their nature, can do better than large ones, but in general the world is loaded against small businesses. Such economies as long production runs and the scale of modern technology—I speak from experience of that from my own constituency, where we have a good deal of it—can be effected in the large firms but make things more difficult for the small ones. But the small firm has advantages over the large one. It is much more adaptable, more resilient, and has the ability more easily and more quickly to respond to the needs of its customers because of this.
The small business is also a very great source—probably the principal source— of new ideas and innovation in development. The existence of a large number of small businesses decreases the likelihood of any one organisation achieving economic or political power because, as my hon. Friend the Member for Harrow, Central shrewdly pointed out, labour relations in small firms are by their nature much better, in general, than labour relations in large firms. He attributed this —and it is part of the reason—to lack of

influence of trade unions in small businesses—a valid point. But I believe it is also because the proprietor, the owner, the manager of the small firm is largely the same person. What is more, this person is much closer to his employees than the manager—let alone the proprietors, through their pension funds, the small investor, and so on—is to employees in a large business. Small firms provide the opportunity for individuals to exercise their personal judgment and initiative, to live their own lives and to depend in a self-reliant way on their own businesses and on what they have created. That is important in our society and constitutes another reason for encouraging the small business sector.
The world is loaded against them in general terms. That is all the more reason for the Government to strive, when opportunities like this occur, to assist the small business and tip the scales back a little towards a balance between small and large businesses. The amendment provides a fairly cheap way of doing that. If the Government resist it that will be a sneaky way of hitting small firms. I hope that the Government will accept it, but if they do not I hope we shall press the matter in the Lobby.

Mr. John Hannam: I rise to support the excellent amendment which has been so ably and lucidly proposed by my hon. Friend the Member for Basingstoke (Mr. Mitchell).
I must comment on the deplorable lack of attendance by Labour Members. This vitally important sector of small businesses represents 93 per cent, of the British economy and only one Labour Member, apart from the Ministers, has bothered to turn up. It is regrettable that the Labour Party seems interested only in very large businesses, and then only how they can be absorbed into the State sector.
First I declare my interest as a small businessman with a family business. It is a service industry, it is capital, intensive with a high labour content, and it has high running costs, so I speak with deep conviction of the problems which face small businesses. Interest rates have doubled and costs are increasing dramatically all the time. Rates and water charges in many areas are up, and certainly in my area of the South-West they have increased 100 per cent, over


1973. Along with VAT, fire precautions and price restraint all add to the cash flow situation.
As my hon. Friend the Member for Gloucestershire, South (Mr. Cope) said, these businesses are the acorns from which the large businesses will grow in the future. Now they face the added imposition of the new corporation tax structure and the addition of the advance corporation tax. The small business generally does not distribute its profits but uses them for expansion and development. Under the new system retained profits are taxed at the higher rate.
As my hon. Friend the Member for Bolton, West (Mr. Redmond) said, the amounts distributed in the form of dividends often go to the members of the family who have ploughed all their savings into the firm and rely on the dividend income to keep it going. Now they are to be hit by the loss of part of those payments which will be paid to the Exchequer in the form of advance corporation tax.
The last Government accepted the need to help small businesses by giving relief up to£15,000 and transitional relief up to£25,000. Those figures are three years old, however, are out of date and should be increased substantially. Now also the tax levy is increased by 2 per cent, and the advance corporation tax requirement is stepped up. If the Government are prepared to see many of these small firms pack up, let them proceed with the measures they propose in the Bill. However, I hope they recognise, as most other countries do, the importance of the smaller firms. I hope they will not remove the incentives and rewards for the people who put in the long hours and take the gamble on their invested savings, receiving quite low returns on their capital, especially in the initial build-up years. If there is no encouragement for this basic structure of industry and commerce, the economy will founder.
I support the amendment because it is an attempt to breath life back into what is rapidly becoming a depressed sector of British industry and trade. It will represent some recognition of the need to give smaller businesses some

encouragement during an increasingly difficult time for them in these inflationary days.
8.45 p.m.
I hope that the Chief Secretary, who has long worn the cloak of champion of the smaller business, will accept the vital amendment and not show himself to be a "streaker" on the Front Bench, naked of any realistic policy for our small businesses. In the context of the graffiti saying, "Streaker repent, your end is in sight" would probably be appropriate in the present context.

Mr, Tim Renton: I, too, should like to speak briefly in support of the amendment so ably moved by my hon. Friend the Member for Basingstoke (Mr. Mitchell). I declare an interest as a director of companies which pay advance corporation tax.
In the Budget debate on 1st April the Chancellor of the Exchequer justified this 50 per cent, increase in ACT by saying that it encourages investment because it applies only to distributions. That is an Alice-in-Wonderland argument. No forced, interest-free loan to a Government has ever encouraged investment, least of all in the case of small companies about which we are talking now.
As my hon. Friend the Member for Exeter (Mr. Hannan) said, the shareholders of many small companies have seen earnings ploughed back over the years, and they rely on income from their shareholdings for their livelihood. As my hon. Friend the Member for South Angus (Mr. Bruce-Gardyne) said, in order to avoid surtax direction small companies often cannot minimise or lessen their dividend distributions. In their case, therefore, the 50 per cent, increase in ACT can only be a serious addition to the liquidity strains which they already face.
The real reason for the increase in ACT lies in the wish of the Chancellor to lessen his own borrowing requirement to the extent of about£315 million, but, as the Chief Secretary will know, things have gone quite well for the Chancellor in this respect since Budget day. Sterling, particularly in the light of the weakness of the dollar, has been quite strong, the Bank of England has been able to sell fairly large quantities of gilts to the public and the money supply growth rate is still slowing down. The figures released yesterday


show an annual growth rate in the money supply of only around 8 per cent. Therefore, the need for the Chancellor to worry about his borrowing requirement is somewhat less now than it was when he made his Budget speech and when he introduced this increase in ACT.
Talking last week to the CBI, the Chancellor said that he would stimulate the economy if he felt that that needed doing, but how will he find that magic touch that will give an instantaneous stimulation to the economy? It has eluded past Chancellors. The sensible thing for the Chancellor to do is to anticipate events somewhat and to show magnanimity. I should like to see the clause removed from the Bill altogether, but if that cannot be done I hope that the Chancellor will accept the amendment. It will help the small business, which will feel such a strain on its liquidity in the months ahead.

The Chief Secretary to the Treasury (Mr. Joel Harnett): In this interesting debate I have been called many names which I did not recognise. I am obliged to hon. Members for those which were charming.
I congratulate the hon. Member for Basingstoke (Mr. Mitchell) on his maiden speech from the Opposition Front Bench. He and I have debated in many Committees on Finance Bills, sometimes on the same side.
I should like to deal first with some of the technical aspects of the amendment, although I would not use them as an argument for resisting it. The amendment refers to "small company" and I am told that it should have referred to "small companies" under the relevant sections and that therefore it is technically wrong. More important, however, it does not prescribe over which period a company should have qualified by having had this level of profits. There is a perverse effect from using Section 95 which deals with the small companies rate; the amendment exempts companies with up to£15,000 of profits but not companies with tax losses. I say that so that we can get the amendment in perspective, but I do not want to rest on that. I want to argue the merits of the case.
Many Conservative Members have said that I have long been a supporter of

small or close companies, as they have been called. I withdraw nothing that I have said on the subject. On the other hand, many of the speeches today—some of them were excellent and I would wholeheartedly agree with them about close companies and their importance to the community—go wide of the amendment.
Clause 10 in relation to companies of the kind of which we have been speaking simply provides that those which pay dividends should pay another 50 per cent, of the ACT. It was not I or this Government who decided that companies should pay ACT in the first place. I have always argued, as I think has the hon. Member for Basingstoke, that close trading companies were much better off under the classical system than under the imputation system—[HON. MEMBERS: "Hear, hear."] This is where I have been unable to understand how Conservatives can keep telling us that the 1965 corporation tax clobbered close companies—[AN HON. MEMBER: "It did."] The hon. Member obviously disagrees with those of his hon. Friends who said, "Hear, hear," when I said that the classical system left these companies better off, so perhaps 1 should explain. I am talking, I emphasise, about trading companies.
Under the classical system, if a trading company could show that it was expanding and ploughing back its profits—that is the type of company that we want to help—it would not only have paid the lower rate of tax on£15,000 and below of profit, as applies at present under the imputation system, but would have paid 40 per cent, tax on the whole of its profits.
I do not want to argue on this narrow amendment the merits of the classical over the imputation system as a whole, but certainly for close companies I have never had any doubt—I was glad to hear that many hon. Members opposite agree —that the classical system was much better for that type of small company. I withdraw nothing that I have said at any time about wanting to help that type of company.
We should see the amendment in the context of our discussion. We are not talking about close companies in the real sense but about small companies. Many close companies pay the small companies rate but what Opposition Members were speaking about were the small


companies and not the large companies on small companies rates.
There are approximately 350,000 close companies. Within that number there are between 130,000 and 150,000 which generally have no profit on which to pay corporation tax. There are between 180,000 and 200,000 with profits below£15,000. Some of those would be affected by the amendment. There are 10,000 with profits of between£15,000 and£25,000 and 15,000 with profits above£25,000.
Only a small number of those companies with profits below£15,000 will wish to pay dividends, although I accept what the hon. Member for Bolton, West (Mr. Redmond) said about some small companies wishing to pay dividends to elderly relatives. Close companies with profits below£15,000 a year would not be compelled to pay dividends by any reasonable inspector of taxes—and most of them are reasonable.
The hon. Member for Upminster (Mr. Loveridge) told us of the great tragedy of small companies which have overdrafts. That type of company would not pay a dividend, would not pay ACT and would not have to pay a supplement to ACT. Those close companies would not suffer from liquidity problems created by the clause. If they are liquid and are not ploughing back any profits they will either pay dividends or be compelled to do so by direction of an inspector of taxes, in which case they will have no cash flow problem. If a company can show the inspector of taxes that it is expanding, whether or not it is liquid, it will not be compelled to pay a dividend.

Mr. David Mitchell: Does the hon. Gentleman agree that private individuals who have invested money in such small businesses are entitled to a return on their investment, and that if They do not get one small businesses will never be able to get private individuals to put up capital?

Mr. Bamett: I have conceded that to the hon. Member for Bolton, West, but that would be only a small number. The burden of the argument put forward by most Opposition speakers is that small companies do not get the bulk of their capital in that way. They get it from

directors and shareholders who are actively working in the company. That is the very nature of most close companies. Before the hon. Member for Bolton, West gets apoplexy, I willingly concede that there are some companies of the kind he described. In the vast majority of cases there are no wealthy relatives who are prepared to put money into close companies. In the vast majority of cases it is the directors' own money I am sure that the hon. Gentleman with all his advice will ensure that there are wealthy relatives to put money into those companies, in which case they will be liquid enough to pay dividend, ACT and a little supplementary ACT.

9.0 p.m.

Mr. Redmond: I was not talking of the people I advise, I was talking about my own family business. If he expects me as a director to finance that business, I assure the hon. Gentleman that the business had to finance me; it was all I had to live on. Some of the shareholders were the descendants or widows of people who contributed to the founding of the business. They were dependent on the business. They had no money to put into the business; the business was keeping them.

Mr. Barnett: I am not sure what the hon. Gentleman is trying to prove. If he is trying to tell me that there are a few companies of that description, then I concede it. I shall come in a moment to whether that type of company will be hit by this supplement to ACT.

Mr. Redmond: They are.

Mr. Bamett: If they are, then the hon. Gentleman will be able to advise them how to do their best. I do not want to deal with one particular company, no matter how well advised it may be. I wish to deal with the amendment which we are now debating.
As to whether the majority of small companies expanding their businesses would be liable to ACT at all, let alone a supplement, I wish to call in aid the hon. Member for Rutland and Stamford (Mr. Lewis) who said that those companies would not show any profit. I will offer the hon. Gentleman some advice. They could show profits provided that they were an expanding company of the type we wish to assist, and they still would


not pay ACT or the supplement to it. In terms of most trading close companies, only a small number will be hurt. There will be some non-trading close companies that will be hurt, in respect of finance in the City. Therefore, some close companies will be liable but, as I understand the situation, that was not the type of company of which Conservative Members were thinking. They were thinking of the important, small, close trading companies and that sort of company will not be hurt very much.

Mr. Loveridge: I should like to know, for we have not had an answer to this question, how much the Government's liquidity would be injured if the Government were to accept this amendment. What is the sum of money involved? If it is as small as the Chief Secretary suggests and is such a trifle, why are not the Government being generous and giving way? If it is a larger figure, then let us hear it.

Mr. Barnett: The answer is that it is impossible to know what the figure would be. We do not know what the small companies would be distributing as dividend.
To come to the question of liquidity, many hon. Members argued—and the hon. Member for Harrow, Central (Mr. Grant) argued this matter with his great knowledge of small companies—that it would be offensive to obtain the money in advance. All kinds of nasty words were used about the provision and I would not dare to repeat them. The hon. Member for Gloucestershire, South (Mr. Cope) talked of the Inland Revenue receiving the money earlier and said that inflation was costing the companies more.
However we could look at the matter in another way. We could say that in the past companies paid their corporation tax some 18 months after the year end and that as a result of inflation they have had the benefit of paying corporation tax 18 months later.

Mr. Loveridge: It is their money.

Mr. Barnett: The hon. Gentleman says, "It is their money". We all agree that there has to be some taxation. They have all been taxed but in the past have had to pay their tax only some 18 months later. I want to make clear what I thought was already clear—that they are

not paying the tax earlier in the sense that they are paying it before the profits are made, but earlier than they had the privilege of paying it, which was 18 months after the year end.
The hon. Member for Gloucestershire, South asked, "Why take it from these companies? The Government can borrow money more cheaply". I am surprised to hear hon. Members opposite talk about the Government being able to borrow more easily and to borrow more. One of the reasons for Clause 10 is precisely to reduce the public sector borrowing requirement. Many hon. Members opposite were constantly attacking the Conservative Government for the size of the public sector borrowing requirement. If there is to be a vote on this matter, I hope that they will join us in the Lobby, because by Clause 10 we seek to reduce the public sector borrowing requirement to a small extent. In any case, as I hope I have shown, this provision does not affect the vast majority of close companies of the kind we want to help.
For these reasons, if the Opposition propose to divide on the amendment, I shall have no hesitation in advising my right hon. and hon. Friends to vote against it.

Mr. Anthony Grant: By how much is the Government's borrowing requirement being reduced?

Mr. Maurice Macmillan: Like my hon. Friend the Member for Basingstoke (Mr. Mitchell) I must declare an interest. I am not a director of a small company as defined in the amendment but I am concerned with a private, unquoted company which though not affected by this amendment will be affected by this clause. I had better declare a double interest, because part of my firm operates in my hon. Friend's constituency, which gives me added pleasure in congratulating him on his speech moving the amendment from the Opposition Front Bench.
Many of my hon. Friends have pointed out what I thought the Chief Secretary to the Treasury to have accepted—some of the advantages that private, unquoted companies of any size have over quoted companies in helping the economy. They are free from the threat of take-overs and can, therefore, afford to take a longer view. They are less tied to short-term results and the need to justify themselves


in the market. In this sense, they have an advantage in many ways over all but the largest public companies.
This is what makes it so important that the amendment should be taken more seriously than the hon. Gentleman has taken it. This clause, taken in conjunction with others, largely deprives the unquoted companies of some of their advantages and some of the contribution they can make to the economy by making their financial and liquidity problems even more difficult.
The evidence that the investment performance of the unquoted sector generally compares favourably with that of the quoted sector is formidable. I will not put it to the Committee now, although I hope to do so at a later stage. I wish that we had had more Government supporters present to hear the debate. The unquoted sector does not employ an insignificant number of people. Excluding State employees—Government servants, nationalised industry employees, local government employees, and so on—the unquoted sector employs about 51 per cent, of the total number of employees, and the quoted sector employs 49 per cent. Broadly speaking, one-third of the total number of employees work directly or indirectly for the State, one-third for public companies and one-third for private companies.
Compared with 9,000 quoted companies, there are 300,000 active unquoted companies. The Minister had a slightly different figure. I think that his was 350.000. This is excluding finance companies and nationalised industries. My figures show that there are about 42,500 private companies whose sales average more than£500,000 a year. I have not had time to do the necessary sums to see how that figure squares with the Minister's on profits. I suspect that it would be a difficult calculation.
Most of the arguments that we have heard in the debate apply to all unquoted companies, which by and large are financed out of retained profits, but they apply most of all to the smaller end of the unquoted sector where, as my hon. Friend the Member for Rutland and Stamford (Mr. Lewis) pointed out, companies depend on their liquidity—their cash position—for their capacity to expand.
My hon. Friend the Member for Basingstoke spoke of the difficulties of companies facing higher raw material costs, inflation, and the problem that money turnovers rising faster than real turnovers brings in financing the additional working capital required for expansion with existing plant, let alone for new investment in new equipment. My hon. Friend the Member for Upminster (Mr. Loveridge) and my hon. Friend the Member for Bolton, West (Mr. Redmond) both referred to the problems of financing working capital out of overdraft, the difficulty that a small company has in converting a loan from short-term to long, and the need to keep overdraft facilities for seasonal fluctations.
My hon. Friend the Member for Upminster asked for some idea of the seasonal impact of Corporation Tax. I cannot tell him that. The only figure that I have been able to estimate is that the total impact of corporation tax as a whole on the company sector as a whole in 1972-73 was£425 million and in 1973-74£625 million; in 1974-75 I estimate it to be£750 million. Those are the figures for January, which is the peak period for paying corporation tax. That is the order of the change, over the past three years, in the impact on the company sector of corporation tax at the peak period.
My hon. Friend the Member for Gloucestershire, South (Mr. Cope) pointed out the value of small companies in making innovations. Here I must again declare an interest in that my firm published a book by Professor John Jukes called "Sources of Invention" in which he made a series of case studies indicating that the greater part of the technical innovation from the end of the war until about five or six years ago came from the unquoted sector. But unquoted companies do not have the same ease in dealing with the problems of technology and economies of scale; their role in the economy is to become larger, to become the companies from which the great companies grow, and to operate on a scale which very large concerns do not find profitable but on which smaller concerns can fulfil a useful and economic function in a way profitable to themselves.
My hon. Friends the Members for Bolton, West and Mid-Sussex (Mr. Renton) referred to dividends and the need for them to be paid because they could not


always all be ploughed back, being the reward of savings of retired directors, workers or members of a family concern. The Chief Secretary cannot get away with the argument that there is no need for a small private company to pay dividends because the directors provide all the capital. It is and always was nonsense to make such a suggestion.

9.15 p.m.

Mr. Joel Barnett: The right hon. Gentleman should not misquote me. I said that trading companies that were expanding would not need to pay dividends and would not be compelled to pay ACT because they would be able to show that they were ploughing back their profits for expansion.

Mr. Macmillan: I disagree with the hon. Gentleman. Perhaps I may quote my own family business when it was a great deal smaller than it is now and certainly came within whatever definition there might have been in those days of a small business. We had a great deal of trouble with a chemist who had lent money to my great-grandfather, and, not unreasonably, wanted some return on it. This is a situation unquoted companies have to face. They are not entirely free from outside investors, whether members of a family or not. It is nonsense to suggest that an unquoted small private company does not need to pay a dividend. I do not see why the hon. Gentleman should seek to discriminate in that way.
I agree with what the Chief Secretary said about surtax directions. I have never found the Inland Revenue reluctant to admit that an operating company requires money for genuine expansion. The hon. Gentleman went on to suggest that small companies would do better under the classical rather than the imputation system. I have also heard that argument made by a retired Prime Minister before now. I am not sure that it is

necessarily true for the larger unquoted companies, but I accept that for the smaller business, particularly in times of inflation, the imputation system is more difficult. That is why we introduced the smaller business rate and why we think that the starting level should go up.
It is not true, nor would I asert that it is, that this Clause 10 alone affects smaller companies in such a disastrous way. However, as my hon. Friend the Member for Basingstoke made clear, it is part of a general package which is pressing harder on small companies than on other sectors of industry. It is nonsense for the Chief Secretary to turn the argument round and to say that because there used to be an 18-months' lag we are not making them any worse off now. When there was an 18-months' lag there was too little investment. The hon. Gentleman is now making the situation worse by removing that lag and forcing this advance payment. He suggested that he was doing it only to help the Government's borrowing requirement. In effect, he is transferring the Government's borrowing requirement to the private sector's borrowing requirement. He has entirely ignored the fact that this is necessary because of public expenditure increases and other policies of the Government he supports.
The hon. Gentleman has in no way satisfactorily answered the points made both succinctly and forcefully by my hon. Friend the Member for Basingstoke in moving the amendment and by others who supported him in the debate. I therefore advise my right hon. and hon. Friends, unless at the last moment the Chief Secretary is willing to help us, to go into the Division Lobby and vote for the amendment.

Question put, That the amendment be made: —

The Committee divided: Ayes 227, Noes 245.

Division No. 28.]
AYES
(9.20 p.m.


Adley, Robert
Bell, Ronald
Bray, Ronald


Alison, Michael (Barkston Ash)
Benyon, W.
Brittan, Leon


Allason, James (Hemel Hempstead)
Bitten, John
Bruce-Gardyne, J.


Amery, Rt. Hn. Julian
Blaker, Peter
Bryan, Sir Paul


Ancram, M.
Bcardman, Tom (Leicester, S.)
Buchanan-Smith, Alick


Atkins,Rt.Hn.Humphrey(Spelthorne)
Body, Richard
Budgen, Nick


Awdry, Daniel
Boscawen, Hop. Robert
Bulmer, Esmond


Balniel, Rt. Hn. Lord
Bowden,Andrew) Brighton,Kemptown)
Burden, F. A.


Barber, Rt. Hn. Anthony
Boyson, Dr. Rhodes (Brent, N.)
Butler, Adam (Bosworth)


Beith, A. J.
Braine, Sir Bernard
Carr, Rt. Hn. Robert




Chalker, Mrs. Lynda
Howell. Ralph (Norfolk, North)
Price, David (Eastleigh)


Channon, Paul
Howells, Geraint (Cardigan)
Prior, Rt. Hn. James


Chatawav, Rt. Hn,. Christopher
Hunt, John
Rathbone, Tim


Clark, A. K. M. (Plymouth, Sutton)
Hurd, Douglas
Rawlinson, Rt. Hn. Sir Peter


Clark, William (Croydon, S.)
Hutchison, Michael Clark
Redmond, Robert


Clarke, Kenneth (Rushcliffe)
Irvine Bryant Godman (Rye)
Rees, Peter (Dover &amp; Deal)


Clegg, Walter
Jenkin, Rt.Hn.P. (R'dgeW'std&amp;W'fd)
Reid, George


Cockcroft, John
Johnson Smith, G. (E. Grinstead)
Renton.Rt. Hn. SirDavid(H't'gd'ns're)


Cooke, Robert (Bristol, W.)
Johnston, Russell (Inverness)
Renton R. T. (Mid-Sussex)


Cope, John
Jones, Arthur (Daventry)
Ridley, Hn. Nicholas


Cormack, Patrick
Jopling, Michael
Ridsdale. Julian


Corrie, John
Joseph, Rt. Hn. Sir Keith
Rifkind, Malcolm


Costain, A. P.
Kaberry, Sir Donald
Rippon, Rt. Hn. Geoffrey


Davies, Rt. Hn. John (Knutsford)
Kellett-Bowmon, Mrs. Elaine
Roberts, Michael (Cardiff, N.-W.)


d'Avigdor-Goldsmid, Maj.-Gen. James
Kimball, Marcus
Rooerts, Wyn (Conway)


Dean, Paul (Somerset, N.)
King, Evelyn (Dorset, S.)
Rodgers, Sir John (Sevenoaks)


Deedes, Rt. Hn. W. F.
King, Tom (Bridgwater)
Ross, Stephen (Isle of Wight)


Dixon, Piers
Kirk, Peter
Rossi, Hugh (Hornsey)


Dodsworth, Geoffrey
Kitson, Sir Timothy
Rost, Peter (Derbyshire, S.-E.)


Drayson, Burnaby
Knight, Mrs. Jill
Sainsbury, Tim


Durant, Tony
Knox, David
Scott-Hopkins, James


Dykes, Hugh
Lamont, Norman
Shaw, Giles (Pudsey)


Eden, Rt. Hn. Sir John
Lane, David
Shaw, Michael (Scarborough)


Edwards, Nicholas (Pembroke)
Langford-Holt, Sir John
Shelton, William (L'mb'th,Streath'm)


Elliott, Sir William
Lawrence, Ivan
Shersby, Michael


Emery, Peter
Lawson, Nigel (Blaby)
Silvester, Fred


Eyre, Reginald
Le Marchant, Spencer
Sims, Roger


Fairgrieve, Russell
Lester, Jim (Beeston)
Sinclair, Sir George


Farr, John
Lewis, Kenneth (Rtland &amp; Stmford)
Skeet, T. H. H.


Fenner, Mrs. Peggy
Lloyd, Ian (Havant &amp; Waterloo)
Smith, Dudley (W'wick&amp;L'm'ngton)


Finsberg, Geoffrey
Loveridge, John
Spence, John


 Fisher, Sir Nigel
Luce, Richard
Spicer, Jim (Dorset, W.)


Fletcher, Alexander (Edinburgh, N.)
McAdden, Sir Stephen
Sproat, lain


Fletcher-Cooke, Charles
MacArthur, Ian
Stainton, Keith


Fookes, Miss Janet
Macfarlane, Neil
Stanbrook, Ivor


Freud, Clement
MacGregor, John
Stanley, John


Fry, Peter
McLaren, Martin
Steel, David


Galbraith, Hn. T. G.
Macmillan, Rt. Hn. M. (Farnham)
Steen, Anthony (L'pool, Wavertree)


Gardiner, George (Reigate&amp;Banstead)
McNair-Wllson, Michael (Newbury)
Stewart, Ian (Hitchin)


Gardner, Edward (S. Fylde)
McNair-Wilson, Patrick (New Forest)
Stodart, Rt. Hn. A. (Edinburgh, W.)


Gibson-Watt, Rt. Hn. David
Marshall, Michael (Arundel)
Stokes, John


Gilmour, Sir John (Fife, E.)
Mather, Carol
Tapsell, Peter


Glyn, Dr. Alan
Maude, Angus
Taylor, Edward M. (Gl'gow, C'cart)


Goodhew, Victor
Maxwell-Hyslop, R. J.
Taylor, Robert (Croydon, N.W.)


Goodlad, A.
Miller, Hal (B'grove &amp; R'ditch)
Tebbit, Norman


Gorst, John
Mills, Peter
Thomas, D. E. (Merioneth)


Gow, Ian (Eastbourne)
Miscampbell, Norman
Thomas, Rt. Hn. P. (B'net,H'dn S.)


Gower, Sir Raymond (Barry)
Mitchell, David (Basingstoke)
Trotter, Neville


Gray, Hamish
Moate, Roger
Tyler, Paul


Grimond, Rt. Hn. J.
Money, Ernie
Waddington, David


Grist, Ian
Monro, Hector
Wainwright, Richard (Colne Valley)


Grylla, Michael
Moore, J. E, M. (Croydon, C.)
Wakeham, John


Hall,Sir John
Morgan, Geraint
Walder, David (Clitheroe)


Hall-Davis, A. G. F.
Morris, Michael (Northampton, S.)
Walker-Smith, Rt. Hn. Sir Derek


Hamilton, Michael (Salisbury)
Morrison, Charles (Devizes)
Watt, Hamish


Hampson, Dr. Keith
Morrison, Peter (City of Chester)
Wells, John


Hannam, John
Neave, Airey
Wiggin, Jerry


Harrison, Col. Sir Harwood (Eye)
Newton, Tony (Braintree)
Wigley, Dafydd (Caernarvon)


Hastings, Stephen
Nott, John
Wilson, Gordon (Dundee, E.)


Havers, Sir Michael
Onslow, Cranley
Winstanley, Dr. Michael


Hawkins, Paul
Oppenheim, Mrs. Sally
Winterton, Nicholas


Hayhoe, Barney
Page, Rt. Hn. Graham (Crosby)
Worsley, Sir Marcus


Henderson.Barry(Dunbartonshire.E.)
Page, John (Harrow, W.)
Younger, Hn. George


Holland, Philip
Pardoe, John



Hooson, Emlyn
Parkinson, Cecil (Hertfordshire, S.)
TELLERS FOR THE AYFS:


Hordern, Peter
Pattie, Geoffrey
Mr. John Stradling Thomas and


Howe, Rt.Hn. Sir Geoffrey(Surrey,E.)
Percival, Ian
Mr. Marcus Fox.




NOES


Allaun, Frank
Blenkinsop, Arthur
Carmichael, Neil


Archer, Peter (Warley, West)
Boardman, H. (Leigh)
Carter, Ray


Armstrong, Ernest
Booth, Albert
Carter-Jones, Lewis


Ashley, Jack
Boothroyd, Miss Betty
Castle, Rt. Hn. Barbara


Ashton, Joe
Boyden, James (Bishop Auckland)
Clemitson, Ivor


Atkins, Ronald (Preston, N.)
Bradley, Tom
Cocks, Michael


Atkinson, Norman
Broughton, Sir Alfred
Cohen, Stanley


Bagier, Gordon, A. T.
Brown, Hugh D. (Glasgow, Provan)
Coleman, Donald


Barnett, Guy (Greenwich)
Buchan, Norman
Colquhoun, Mrs. M. N.


Barnett, Joel (Heywood &amp; Royton)
Buchanan,Richard(G'gow.Springbrp)
Concannon, J. D.


Bates, Alf
Buller,Mrs.Joyce[...] gey.WoodGreen)
Conian, Bernard


Bennett, Andrew F. (Stockport, N.)
Callaghan, Jim (M'dd'ton &amp; Pr'wich)
Cook, Robert F. (Edinburgh, C.)


Bidwell, Sydney
Campbell, Ian
Cox, Thomas


Bishop, E. S.
Cant, R. B.
Craigen, J. M. (G'gow Maryhill)







Cronin, John
Jackson Colin
Parry, Robert


Crosland, Rl. Hn. Anthony
Janner, Greville
Pavltt, Laurie


Cryer, G. R.
Jay, Rt. Hn. Douglas
Peart, Rt. Hn. Fred


Cunningham, G.flsl'ngt'n.S&amp;F'sb'ry)
Jenkins, Hugh (W'worth, Putney)
Pendry, Tom


Cunningham, Dr. JohnA.(Whiteh'v'n)
Johnson,James(K'ston upon Hull.W)
Phlpps, Dr. Colin


Davidson, Arthur
Johnson, Walter (Derby, S.)
Prescott, John


Davies, Denzil (Llanelli)
Jones, Barry (Flint, E.)
Price, Christopher (Lewisham, W.)


Davies, Ifor (Gower)
Jones, Dan (Burnley)
Price, William (Rugby)


Davis, Clinton (Hackney, C.)
Jones, Gwynoro (Carmarthen)
Radice, Giles


Deakins, Eric
Jones, Alec (Rhondda)
Richardson, Miss Jo


Dean, Joseph (Leeds, W.)
Judd, Frank
Roberts, Albert (Normanlon)


Delargy, Hugh
Kaufman, Gerald
Roberts, Gwilym (Cannock)


Dell, Rt. Hn. Edmund
Kelley, Richard
Roderick, Caerwyn E.


Dempsey, James
Kilroy-Silk, Robert
Rodgers, George (Chorley)


Doig, Peter
Kinnock, Neil
Rooker, J. W.


Dormand, J. D.
Lamble, David
Roper, John


Duffy, A. E. P.
Lamborn, Harry
Rose, Paul B.


Dunn, James A.
Lamond, James
Ross, Rt. Hn. William (Kilmarnock)


Dunnett, Jack
Latham, Arthur(CityofW'minsterP'ton)
Sandelson, Neville


Dunwoody, Mrs. Gwyneth
Lawson,George (Molherwell&amp;Wishaw)
Sedgemore, Bryan


Eadie, Alex
Leadbitter, Ted
Selby, Harry


Edelman, Maurice
Lee, John
Shaw, Arnold (Redbridge, llford, S.)


Edge, Geoff
Lestor, Miss Joan (Eton &amp; Slough)
Sheldon, Robert (Ashton-under-Lyne)


Edwards, Robert (W'hampton, S.E.)
Lever, Rt. Hn. Harold
Shore, Rt. Hn. Peter (S'pney&amp;P'plar)


Ellis, John (Brigg &amp; Scunthorpe)
Lewis, Ron (Carlisle)
Short, Rt. Hn. E. (N'ctle-u-Tyne)


Ellis, Tom (Wrexham)
Lipton, Marcus
Silkin, Rt. Hn. John (L'sham.D'lord)


English, Michael
Lomas, Kenneth
Si!kin,Rt.Hn.S.C.(S'hwark,Dulw!ch)


Evans, Fred (Caerphilly)
Loughlin, Charles
Sillars, James


Evans, I. L. (Aberdare)
Loyden, Eddie
Silverman, Julius


Evans, John (Newton)
McElhone, Frank
Sknnei, Dennis


Ewing, Harry (St'ling.F'klrk&amp;G'm'th)
MacFarquhar, Roderick
Smith, John (Lanarkshire, N.)


Faulds, Andrew
McGuire, Michael
Snape, Peter


Fernyhough, Rt. Hn. E.
Mackenzie, Gregor
Spriggs, Leslie


Fitch, Alan (Wigan)
Maclennan, Robert
Stewart, Rt. Hn. M. (H'sth, Fulh'm)


Flannery, Martin
McMillan, Tom (Glasgow, C.)
Stoddart, David (Swindon)


Fletcher, Ted (Darlington)
McNamara, Kevin
Stott, Roger


Foot, Rt. Hn. Michael
Madden, M. 0. F.
Strang, Gavin


Ford Ben
Mahon, Simon
Strauss, Rt. Hn. G. R.


Forrester, John
Mallalieu, J. P. W.
Summersklll, Hn. Dr. Shirley


Fraser, John (Lambeth, Norwood)
Marks, Kenneth
Swain, Thomas


Freeson, Reginald
Marquand, David
Thomas, Jeffrey (Abertillery)


Garrett, John (Norwich, S.)
Marshall, Dr. Edmund (Goole)
Thorne, Stan (Preston, S.)


Garrett, W. E. (Wallsend)
Mayhew, Christopher (G'wh,W'wch,E)
Tierney, Sydney


George, Bruce
Meacher, Michael
Tinn, James


Golding, John
Melllsh, Rt. Hn. Robert
Torney, Tom


Gourlay, Harry
Mlkardo, Ian
Tuck, Raphael


Graham, Ted
Millan, Bruce
Urwin, T. W.


Grant, George (Morpeth)
Miller, Dr. M. S. (E. Kilbride)
Varley, Rt. Hn. Eric G.


Grant, John (Islington, C.)
Milne, Edward
Walnwright, Edwin (Dearne Valley)


Griffiths, Eddie (Sheffield, Brightside)
Mitchell, R. C. (S'hampton, Itchen)
Walden, Brian (B'm'ham, Ladywood)


Hamilton, William (Fife, C.)
Moonman, Eric
Walker, Harold (Doncaster)


Hamling. William
Morris, Alfred (Wythenshawe)
Walker, Terry (Kingswood)


Hardy, Peter
Morris, Charles R. (Openshaw)
Watkins, David


Harper, Joseph
Morris, Rt. Hn. John (Aberavon)
White, James


Harrison, Walter (Wakefield)
Moyle, Roland
Whitelaw, Rt.Hn. William


Hart, Rt. Hn. Judith
Mulley, Rt. Hn. Frederick
Willey, Rt. Hn. Frederick


Hattersley, Roy
Murray, Ronald King
Williams, Alan (Swansea, W.)


Hatton, Frank
Newens, Stanley (Harlow)
Williams,Rt.Hn. Shirley (H'f'd&amp;St'ge)


Healey, Rt. Hn. Denis
Oakes, Gordon
Williams, W. T. (Warrington)


Heffer, Eric S.
Ogden, Eric
Wilson, William (Coventry, S.E.)


Hooley, Frank
O'Halloran, Michael
Wise, Mrs. Audrey


Horam, John
O'Malley, Brian
Woodall, Alec


Huckfield, Leslie
Orbach, Maurice
Woof, Robert


Hughes, Rt. Hn. Cledwyn (Anglesey)
Ovenden,John
Wrigglesworth, Ian


Hughes, Robert (Aberdeen, North)
Owen, Dr. David
Young, David (Bolton, E.)


Hughes, Roy (Newport)
Padley, Walter



Hunter, Adam
Palmer, Arthur
TELLERS FOR THE NOES:


Irvine, Rt. Hn. Sir A. (L'p'l,EdgeHill)
Park, George (Coventry, N.E.)
Mr. James Hamilton and


Irving. Rl. Hn. Sydney (Dartlord)
Parker, John (Dagenham)
Mr. Ernest Perry.

Question accordingly negatived.

Mr. Michael Shaw: I beg to move Amendment No. 31, in page 6, line 39, after 'tax', insert
'on any dividends declared after 26th March 1974'.

The Temporary Chairman (Mr. Harold Gurden): With this we are to take the following amendments:

No. 23, in page 6, line 39, after 'tax', insert
'on distribution made after 26th March 1974'.

No. 48, in page 6, line 39, after 'tax', insert
'otherwise than in respect of dividends declared before 27th March 1974'.

Mr. Shaw: The discussions today, although important and interesting, have


been of a general character. We now move on to a more detailed examination of the clause, dealing with a completely new aspect of raising tax. I shall briefly sketch the background.
Under the new system of corporation tax, when a dividend is paid by a company it is regarded as having been paid out of the taxed funds of the company. Thus, the sum received by the shareholder is regarded as a net sum from which tax at the basic rate has already been deducted. As corporation tax is not due to be paid for some time after the end of the company's year, the tax notionally paid on any dividend would not normally be paid in the form of corporation tax until long after the payment of the dividend. Therefore, up to the present, the law has demanded, quite reasonably, that the tax that has notion-ally been deducted from the dividend should be paid almost immediately to the Inland Revenue and then treated as being an advance of the mainstream corporation tax liability. This system is known and understood by everyone. Accordingly, everyone, including Labour hon. Members——

Mr. William Clark: Look at them!

Mr. Shaw: We are delighted to have them with us, but whether they are taking a real interest in our proceedings is another matter. As I was saying, the system is known by everyone who has to make a judgment as to the appropriate dividend that should be paid. However, this year, without any notice, the Government have chosen to alter the time schedule for the payment of a part of a company's corporation tax liability. Up to now corporation tax has been paid between nine months and 21 months after the year end, except when tax on the dividend is paid at an earlier date, as I have already explained.
The Government now propose that some of the tax shall be paid much more quickly. The basis of arriving at how much should be paid more quickly is based on the amount of advance corporation tax that is paid on the dividend. In future not only will advance corporation tax be paid on the dividend but, in addition, a 50 per cent, charge will be paid in accordance with the Clause.
There has as yet been no reasoned argument for such an additional advance

payment. I suppose that we can hope to receive such an argument during the course of the debate on the Question, "That the clause stand part of the Bill." My amendment concerns the element of retrospection in the Bill as drafted. The additional 50 per cent, on the ACT is payable in respect of any ACT due at any time during the financial year 1974. That raises two points straight away. First, when is ACT due? It is due 14 days after the end of the quarter in which the dividend is paid. What the clause as drafted does not say is what happens if the ACT is not only due but is overdue. If a dividend had been paid not in the previous quarter but in the quarter before that, and for some reason the ACT had not been paid and was overdue, would the additional 50 per cent, charge be made on the overdue portion of the ACT?
The second point concerns what happens if dividends are paid in the last quarter of this financial year—namely, in the first quarter of the calendar year 1975, which is the quarter ending 31st March 1975. The ACT will be due to be paid in the second quarter. Presumably there would be no 50 per cent, charge. When directors are deciding what dividend to pay during the first quarter of next year they will be entitled to assume that there will be no Clause 10 liability on that dividend.
Let us consider what will happen it the Bill remains as it is now. Any dividend paid in the quarter to 31st March 1974 is due to have its advance corporation tax paid in the first 14 days after 31st March. On that advance corporation tax a further 50 per cent, will now have to be paid. This clause therefore affects decisions taken by boards as far back as last December, that is, any payments during the first quarter of the year. Some of those payments will be made as a result of a declaration of dividends in 1973.
It seems very unjust that a board should take a decision, possibly four months before Budget Day, about what dividends it can afford to distribute, knowing what the law is and that the rates of existing taxes are changed from time to time in various ways but having no foreknowledge of this new tax. In certain circumstances this tax can make a considerable difference to the cash flow of companies.


I believe this to be wrong. The sums involved are substantial, and far higher than should be the case with any changes in the rates of tax. For example, for every£100 paid in dividend a further£22 will have to be found immediately to meet the Clause 10 liability, together with about£43 for advance corporation tax.
In addition to the Government conceding this amendment I would like the right hon. Gentleman to give a specific assurance on the following point. If a company can demonstrate that no mainstream liability will be due as a result of a company's profits in any year, will the Revenue not enforce any possible payment under Clause 10? I do not believe that this would cause any substantial loss on the part of the Revenue. It has to be remembered that any late payment of tax —if it is found that Clause 10 payments ought to have been made—will suffer a 6 per cent, interest without any tax relief so that the deterrent will be there not to make any unjustified claims.
Whatever may be the merits of the Clause—and they are hard to find—in my view there can be no justification for making the charge under that clause apply to any dividends declared prior to 26th March 1974, on which date a board of directors would have been aware for the first time of this new, and in many cases serious, advance payment of corporation tax.

[Mr. OSCAR MURTON in the Chair]

9.45 p.m.

Mr. William Clark: I support my hon. Friend the Member for Scarborough (Mr. Shaw). I do not think that the Government have thought this through. I am sure they do not mean to introduce retrospective legislation but I must tell the Paymaster-General that on the accelerated advance corporation tax it is really nonsense to say that during the tax year 1974 on any dividend that has been paid another 50 per cent, advance corporation tax should be paid.
I remind the right hon. Gentleman that we have been speaking this evening about company liquidity. Not necessarily all companies can pay on their equity ordinary shares. Take the case of the company that can maintain only its

preference dividend. It does so, assuming it has sufficient profit to pay it, as projected by the board of directors. It may be that then the cash flow is such that the Government then say, "You have paid a preference dividend on 10th January 1974 and you paid your ACT. Now we want another 50 per cent, on the ACT." Surely, the Paymaster-General cannot say that this is at all equitable.
He has been making great play in previous debates, supported by his right hon. Friend the Chancellor, about how he wants to help and how he is going to look after profits—"profits" being no longer, apparently, a dirty word. We should not say on 26th March that payments made before that date should bear an additional liability. I trust the Paymaster-General will not say that this is not really a charge because the company will get the money back. I remind him that if the 50 per cent. ACT is paid and because of the cash flow that company has to make extra borrowing, it may, as he has said, be able to go to the banks, because in a previous debate the Paymaster-General said that he and his hon. Friends were thinking that if companies ran into difficulties in the future the Government would check the situation with the banks. But many companies which are suffering from a cash flow problem just cannot afford to borrow from the banks at the current interest rate. It is poppycock glibly to say that the Government are thinking of talking to the banks so that companies can get help with the cash flow. They cannot afford the going rate of interest.
The 50 per cent, advance corporation tax is an enforced loan to the Government. The Government of the day may say that it is quite right for businesses to make an enforced loan to the Government but I do not believe that even the Paymaster-General or the Chief Secretary would say in equity that this forced loan should apply to payments made before the Government took their decision on 26th March. I trust the Paymaster-General is taking on board the point that it is nonsense to say, on the one hand, that the Government are trying to help companies and, on the other, "We are going to make you give an enforced loan to the Government retrospectively."

Mr. Peter Hordern: I am very happy to support the amendment so ably moved by my hon. Friend the Member for Scarborough (Mr. Shaw). I will give the First Secretary one or two specific examples of the difficulties that companies are facing in relation to the Bill which this amendment seeks to correct. Let us consider the case of a company whose financial year ended 31st March last and which paid an interim dividend to its shareholders on 1st February. That company would have reserved an ACT of some three-sevenths of the dividend and this sum would have been set aside for payment by 14th April, the normal date.
Having made this provision the company finds that an extra sum which has not been reserved has to be provided, a sum which can therefore come only from funds which otherwise would have been spent on investment in the company or industrial investment. That is the only source from which these funds can come. Of course, the payment is retrospective and companies could not have made any provision for it.
The amendment seeks to remove the element of retrospection. What the Government propose presents a further disadvantage to cash flow. As it appears in the Bill, and from what the Chancellor said, it seems that a company in this position will have to reserve the ACT payment, the larger amount, and that that payment cannot be offset against the mainstream corporation tax until 1st February 1976. I am referring only to the element of the ACT, what might be called surcharge, which is not offsettable against mainstream corporation tax and which would normally have been available in 1975.
In an earlier amendment the Chief Secretary said that it was fortunate for companies that they did not now pay the tax quite so soon and that his Government and previous Governments had been considerate in not demanding more rapid tax payment. Developing that argument further, I suppose companies should consider themselves fortunate that they do not have to pay an advance levy before making a profit at all. It appears that not only is the tax being required much sooner, but the set off against mainstream corporation tax is being delayed. That means that the Government are asking

for other people to pay their bills much sooner and that the Government are not prepared to pay their own bills until much later.
In previous amendments we discussed the effect of cash flow on companies and on industrial investment. The Chief Secretary was quite open in his remarks on the previous amendment when he said that the scheme would be bound to have its effect on companies' cash flow. He said that the borrowing requirement was very large—and what else did the Committee expect. This sum certainly has to be met from companies in the private sector. But what about the argument of the flow of funds? There is a staggering turnround, and if we take into account the balance of payments deficit, even on the most favourable assumption, and the Budget deficit, it appears that to meet the public sector deficit£2,000 million at least will require to be found from the private commercial and industrial sector. That is why there is bound to be a real squeeze on corporate cash flow and, ultimately, on profits. The Government are deluding themselves if they do not accept that the pressure on cash flow and on profits will be very severe.
I hope that the Paymaster-General will enlighten me on one matter. It relates to the unforeseen consequence of the position under Statutory Instrument No. 659 by which dividends are frozen to within 5 per cent, of those of the previous year. I understand that the effect of the increase—the surcharge—on ACT has been to make the permitted increase not 5 per cent., but about 0-5 per cent.
Perhaps I may give the Committee an example that has been given to me and ask the Paymaster-General to comment on whether this is right. Under the normal position, for a company which had a gross dividend of£100 the dividend payable would be£70 and the ACT element would be£30. In year two, before this surcharge, had the company wished to increase its gross dividend by 5 per cent, the gross dividend would have been£105, the dividend itself would have been£73-5 and the ACT element would have been£31-5. As I understand it, the effect of the increase in the surcharge is that the gross dividend will be£105, the dividend itself will be£70-35 and the ACT element will be£34-65. I am not clear


whether that is the position, but that is what it appears to be on reading the Bill.
If that is the case, a most serious situation arises, because the statutory prices and incomes policy is supposed to be fair to every section of the community and as part of the bargain shareholders are to be restricted to increases of only 5 per cent, of their dividends. But if my interpretation of the proposal in the Bill is correct, they will get an increase not of 5 per cent, but of only 05 per cent. Any talk of a social compact is not sensible. It applies to wages but not to those who are elderly and in receipt of pensions who will be seriously affected by these provisions.
I hope that the Paymaster-General will be able to tell me that my interpretation is wrong, and I look forward with some anticipation to hearing what he has to say.

Mr. Peter Rees: I rise with enthusiasm to support the amendment so ably moved by my hon. Friend the Member for Scarborough (Mr. Shaw).
This measure was introduced by the Chancellor as one of considerable ingenuity. I think that on closer examination the ingenuity evaporates and the anomalies and hardships become more apparent, and it is to correct some of those anomalies that my hon. Friend has moved the amendment.
This provision has been described as an enforced loan by companies to the Exchequer, and the answer comes pat that it is an enforced loan that will be repaid after a fairly short time, but what about a company which, deluded by the bland words of the Chancellor of the Exchequer to the CBI, has re-equipped itself lavishly, or is about to do so, and will be entitled to considerable capital allowances? It may be that in that situation it will not have any liability to mainstream corporation tax.
On the other hand, perhaps the chairman so as to preserve trustee investment status for the shares in his company, will feel compelled to recommend a dividend. In that situation, that company will pay the extra charge to ACT but will not be able to be relieved of it against its mainstream corporation tax for many years. Have the Paymaster-General and his col-

leagues thought about that kind of situation? That is not precisely the point made by my hon. Friends on the amendment, but it demonstrates that this provision in the Bill is likely to create all sorts of anomalies and hardships.
One can understand the argument that, if a board of directors or a general meeting declares a dividend after 27th March, they must be presumed to do so with (heir eyes open and that therefore they must carry this extra burden, but it is not as simple as that. The decision may have been taken beforehand. In practical terms, if the decision has been taken and communicated to the Stock Exchange, it would not be possible in commercial life for the company to alter its dividend.
Again, it may be that an interim dividend has actually been declared before 27th March but not paid, and there will not, therefore, be any legal liability on the company to pay it until afterwards. In that situation, the advance corporation tax will not become payable until after 27th March, but it will stem from a decision taken before that date. It is that kind of case which the Government must consider more closely. Being generous-hearted people who genuinely mean the kind things that they have been saying to the CBI, they will, I am sure, want to look more closely at this clause. As an earnest of their good intentions they could at least accept the amendment.

Mr. Nott: I suppose that, in answering this deficient clause, the Paymaster-General may say that if companies do not know their corporation tax liability until the Budget, it is not unreasonable to make this provision apply to dividends declared before the Budget in a case in which ACT is not payable until after the Budget. The argument no doubt will be, since we do this with corporation tax, why not with ACT?
But that argument does not cover what I understood from the Budget Statement to be the Chancellor's intention. His intention, as set out in the clause, is that this clause 10 arrangement would apply to 1974. It will not be good enough for the Paymaster-General to say "Corporation tax is not known until the Budget and therefore it was reasonable for us to increase the imposition on companies in the Budget of this additional liability where advance corporation tax was not payable


until after the Statement. 1 hope that that argument will not be used.

Mr. Ian Percival: My hon. Friends who understand the complexities of this subject have advanced powerful technical reasons in support of the amendment. My support is on much more general grounds.
The amendment draws attention to a feature of the clause which is objectionable both in principle and for the practical difficulties that it will bring—that is, the retrospective effect of it. During the last debate, the Chief Secretary nodded assent when my right hon. Friend the Member for Farnham (Mr. Macmillan) said that the purpose was to transfer part of the borrowing requirement from the public to the private sector. As if that were not bad enough, it is wholly unjustifiable and objectionable in principle to do it retrospectively.
May I explain the practical difficulty? Representing Southport, where we do not have many big businesses, although we do have many small and medium ones, my interest is mainly in the latter. When the Chief Secretary was speaking I had the feeling, as I had from the look on his face when he was listening, that he did not appreciate that what he is doing creates practical difficulties and increases the burdens of medium and small businesses which are suffering considerable difficulties.
We shall have many figures from the right hon. Gentleman, as we had from the Chief Secretary, but no figures that he produces can disguise the fact that this will present an additional burden—it is intended to do so—which the small and medium businesses, as well as the large, will suffer.
I hope that the Paymaster-General will realise the purely practical point that it makes a difference to a company which has declared a dividend prior to that date. It will have worked out all the financial implications and have decided that it is in the interests of its business to do that.
If the company then finds that because of an unforeseen circumstance it has to bear yet another burden, it is presented with practical and in some cases severe difficulties. For those general and simple but I hope telling considerations of principle and practice, I hope that the Pay-

master-General will accept the amendment.

Mr. Dell: The main burden of the argument has been that the clause is retrospective in its effect. Associated with the amendment various other matters have been raised about the operations of the ACT supplement, which arise on later amendments. The amendment tabled by the hon. Member for Croydon, South (Mr. Clark) deals with what happens if the supplement exceeds the mainstream corporation tax. I suggest that that point, which has been noted and thought about, should be dealt with by my hon. Friend the Chief Secretary when we come to that amendment.
The point at issue here is whether the clause has retrospective effect in respect either of dividends declared before 26th March 1974 or distributions made before 26th March 1974, depending on the wording of the amendment—whether of Amendment No. 31 or the associated Amendment No. 23. The clause is not retrospective. To adopt either of the amendments would go a long way towards wiping out the value of the ACT supplement in assisting the Government to bring down the borrowing requirement.
We estimate that the loss of yield to the ACT supplement if Amendment No. 31 were accepted would be about£175 million, although it is difficult to estimate a figure. It would be more than half of the total expected yield of the ACT supplement.
Amendment No. 23 is more modest in effect, because it is confined to distributions made after 26th March 1974. Our estimate of the loss of yield in that case is between£80 million and£90 million, in other words more than one quarter of the estimated total yield of the ACT supplement.
The Committee knows that one of the major concerns of my right hon. Friend in preparing his Budget was to reduce the borrowing requirement. This method was decided upon for that purpose. There were alternative ways to get the company sector to make a contribution to bringing down the borrowing requirement which would have been far more damaging to the company sector but which would not, in the view of Opposition Members, have been retrospective.
For example, it would have been possible to raise the level of corporation tax beyond 52 per cent. That would have been a way of bringing money into the Government and thereby reducing the borrowing requirement. We did not want to do that because we realised that it might be damaging. We wanted to find a way of increasing the yield from the company sector in the year 1974 to help us with the borrowing requirement but without forcing the company sector to pay more tax in total than was necessary for other purposes.
This is what we have done in the ACT supplement. The curious thing is that to declare such a higher rate of corporation tax in respect of the profits of the year 1973 would not have been regarded as retrospective; it is part of the ordinary system. Here all that is being done is that the overwhelming majority of companies are being asked to advance the date on which they pay some of their corporation tax liability.

Mr. Nort: This is surely different from raising the rate of corporation tax, since it is purely fortuitous. It means that if a company happens to decide that it will pay dividend one or two days late or early, then, as a result of that fortuitous decision, it will have to bear an extra tax imposition. That is different from the situation where the Chancellor in his Budget raises corporation tax to 52 per cent. It is the fortuitous nature of the Clause to which we are objecting.

Mr. Dell: I do not agree that this is quite different. The question we are considering is what companies know when they make their decision on dividends. They do not know what will be the level of corporation tax in 1973, they certainly do not know that when they decide to declare their dividend, and they do not know about any ACT supplement. All the ACT supplement does it to bring forward the payment of their corporation tax liability.

Mr. Peter Rees: There is a fundamental difference because, on the whole, a company does not budget to make lower profits because it hears that taxation has gone up; it wants to maximise profits. But when it comes to distribution, the decision that has to be made is: "How much do we pay? What will it cost us in terms of cash and advance corporation

tax?" The right hon. Gentleman is not making a valid point in this respect.

Mr. Dell: This is the point about the ACT supplement. It does not cost them more, because it is offset against corporation tax liability. They have to pay some of their corporation tax liability earlier. They are not being asked to pay more. The question is: what did they know when they made their dividend decision? They did not know about the rate of corporation tax or about this ACT supplement. All they are being asked to do is to advance the payment of their corporation tax liability.

Sir John Hall: May I put the point simply, as a chairman deciding whether to declare a dividend and, if so, how much? He makes certain assumptions about the rate of corporation tax, and there are indications as to what that might be. Most people will calculate this at roughly 50 per cent, and it might be 2 per cent, or 3 per cent, more, as it has turned out to be. However, a chairman would not assess an additional surcharge of 50 per cent, above that. If a chairman thought that to be a possibility, his whole attitude towards the amount declared in dividend, or, indeed, in respect of any dividend at all, would be different because of the effect on cash flow.

Mr. Dell: With respect to the hon. Gentleman, that is making the same point again. I do say that this is not retrospective. The payment is a payment against corporation tax liability, but is made rather earlier than the ordinary tax liability. We discussed earlier the fact that corporation tax liability tends to arise rather late in this country compared with the situation in some other countries. Here a proportion of that liability is brought forward.

Mr. William Clark: Does not the right hon. Gentleman agree that this is an enforced loan to the Government?

10.15 p.m.

Mr. Dell: It is not an enforced loan in respect of these companies, which will have a mainstream corporation tax liability which will cover the supplement. That applies in the great majority of companies. The other case on which hon. Members have spoken will be dealt with by an amendment to be discussed


later. The clause is so worded as to give companies time, if they need it, to accumulate the money to make this payment of the supplement. They have, in respect of distributions covered by the amendment, until 1st September 1974 to pay. This gives them the necessary time.
A point which hon. Members have not raised is whether they intend by the amendment to defer the 12-month supplement beyond the date of 26th March —or whether they want to confine the supplement to the nine months, which is the effect of the amendment. But that would be equally unacceptable because it would delay payments which the Government need to cover the borrowing requirement. We do not regard this provision as retrospective. I cannot see that it is retrospective, and, as retrospection is the core of the argument, I reject the argument.

Mr. Percival: Surely the position is that a board meeting to decide whether to declare a dividend before 26th March would say, "The law is that if we declare a dividend we shall have to pay so much in ACT and will have to be credited with that amount against corporation tax liability whenever it arises." As a result of Clause 10, however, the board will find that the law is different from what it was when it arrived at its decision. The result will be that the company will have to pay more as an immediate consequence, although it will get credit for the amount later. Is that not a retrospective change in the law?

Mr. Dell: I do not believe it to be retrospective. Companies pay it on 1st September. I have emphasised several times that this would not be the only piece of knowledge which they would lack when they made their distribution decision. I repeat that, as the core of the argument has been that the provision is retrospective and I deny that argument, I can only recommend my right hon. and hon. Friends to oppose the amendment if it is pressed to a Division.
The hon. Member for Horsham and Crawley (Mr. Hordern) asked about the effect of Statutory Instrument No. 659 in this context. I had come difficulty in understanding all the figures he set out, and I should like to study what he said.

But my initial reaction is that it does not have the effect he thinks it had. However, I will look at it to see whether it has such effect.

Mr. Michael Shaw: The right hon. Gentleman has not replied to any of the queries I put to him—first, about the case in which ACT is not only due but overdue, and, secondly, whether he would confirm the situation with regard to dividend paid in the quarter ending 31st March 1975.

Mr. Dell: I apologise to the hon. Gentleman. In reply to the first question I can say that the supplement does not operate on overdue ACT actually paid in the financial year 1974. I will look at the second question he raised.

Mr. Maurice Macmillan: I find the right hon. Gentleman's arguments wholly unconvincing. He began blandly by saying that the provision is not retrospective because it is so important to helping the Government to reduce the borrowing requirement. Then he pointed out the effect which the amendment would have on the reduction of the borrowing requirement. Later he added to these bald statements the argument that it was not retrospective because it was useful. But he has been very unconvincing.
The right hon. Gentleman even said that part of the argument was that we in this country were lucky because companies in other countries pay corporation tax much earlier. That has nothing to do either with the clause or with the arguments that my hon. Friends have advanced.
The right hon. Gentleman also said that the Government could think of many ways more damaging to industry of reducing the borrowing requirement. 1 have no doubt that they could, but 1 do not think that that is a convincing example. If a man has his hand cut off and is then told that he could have lost both his arms, he will not regard that as much comfort. Of course, this is an interest-free forced loan to the Government and it is quite different from instances of the kind that the right hon. Gentleman quoted.
As my hon. Friend the Member for St. Ives (Mr. Nott) and my hon. and learned Friend the Member for Dover


and Deal (Mr. Rees) pointed out, it is known that corporation tax is coming when a dividend is declared. It is known that there will be advance corporation tax on that dividend. What is not known and cannot be known when a dividend decision is made is that the timing and the amount of the dividend—in other words, that decision itself—will change the amount of liability to corporation tax and advance corporation tax.

Businessmen have come to accept that they depend upon future decisions of the Government in the Budget. But this is the first time that those future decisions have been so linked with theirs that, in deciding on dividend policy, in effect they

are also deciding on a level of advance payment.

If it is not known, when a decision is taken, that it will have a future effect of this sort, the legislation bringing it in is genuinely retrospective, and the company suffers damage to its cash flow which it could in no way have anticipated.

I advise my right hon. and hon. Friends to divide the Committee in support of the amendment.

Question put, That the amendment be made:—

The Committee divided: Ayes 224, Noes 250.

Division No. 29.)
AYES
[10.21 p.m.


Adley, Robert
Finsberg, Geoffrey
Lamont, Norman


Alison, Michael (Barkston Ash)
Fisher, Sir Nigel
Lane, David


Allason, James (Hemel Hempstead)
Fletcher, Alexander (Edinburgh, N.)
Langford-Holt, Sir John


Amery, Rt. Hn. Julian
Fletcher-Cooke, Charles
Lawrence, Ivan


Ancram, M.
Fookes, Miss Janet
Lawson, Nigel (Blaby)


Atkins,Rt.Hn.Humphrey(Spellhorne)
Fox, Marcus
Lester, Jim (Beeston)


Balniel, Rt. Hn. Lord
Freud, Clement
Lewis, Kenneth (Rtland &amp; Stmford)


Barber, Rt. Hn. Anthony
Fry, Peter
Lloyd, Ian (Havant &amp; Waterloo)


Beith, A. J.
Galbraith, Hn. T. G.
Loveridge, John


Benyon, W.
Gardiner, George (Reigate&amp;Banstead)
Luce, Richard


Biffen, John
Gardner, Edward (S. Fylde)
McAdden, Sir Stephen


Blaker, Peter
Gibson-Watt, Rt. Hn. David
MacArthur, Ian


Boardman, Tom (Leicester, S.)
Gilmour, Sir John (Fife, E.)
Macfarlane, Neil


Boscawen, Hon. Robert
Glyn, Dr. Alan
MacGregor, John


Bowden,Andrew (Brighton,Kemptown)
Goodhew, Victor
McLaren, Martin


Boyson, Dr. Rhodes (Brent, N.)
Goodlad, A.
Macmillan, Rt. Hn. M. (Farnham)


Braine, Sir Bernard
Gorst, John
McNair-Wilson, Michael (Newbury)


Bray, Ronald
Gow, Ian (Eastbourne)
McNair-Wilson, Patrick (New Forest)


Brittan, Leon
Gower, Sir Raymond (Barry)
Madel, David


Bruce-Gardyne, J.
Gray, Hamish
Marshall, Michael (Arundel)


Bryan, Sir Paul
Grimond, Rt. Hn. J.
Mather, Carol


Buchanan-Smith, Allcn
Grist, Ian
Maude, Angus


Budgen, Nick
Grylls, Michael
Maxwell-Hyslop, R. J.


Bulmer, Esmond
Hall, Sir John
Meyer, Sir Anthony


Burden, F. A.
Hall-Davis, A. G. F.
Miller, Hal (B'grove &amp; R'ditch)


Burler, Adam (Bosworth)
Hamilton, Michael (Salisbury)
Mills, Peter


Carlisle, Mark
Hampson, Dr. Keith
Miscampbell, Norman


Carr, Rt. Hn. Robert
Hannam, John
Mitchell, David (Basingstoke)


Chalker, Mrs. Lynda
Harrison, Col. Sir Harwood (Eye)
Moate, Roger


Channon, Paul
Hastings, Stephen
Money, Ernie


Clark, William (Croydon, S.)
Havers, Sir Michael
Monro, Hector


Clarke, Kenneth (Rushcliffe)
Hawkins, Paul
Moore, J. E. M. (Croydon, C.)


Clegg, Walter
Hayhoe, Barney
Morgan, Geraint


Cockcrott, John
Henderson,Barry(Dunbartonshire,E.)
Morris, Michael (Northampton, S.)


Cooke, Robert (Bristol, W.)
Hooson, Emlyn
Morrison, Charles (Devizes)


Cope, John
Hordern, Peter
Morrison, Peter (City of Chester)


Cormack, Patrick
Howe, Rt.Hn. Sir Geoffrey(Surrey,E.)
Neave, Airey


Corrie, John
Howell, Ralph (Norfolk, North)
Neubert, Michael


Costain, A. P.
Howells, Geralnt (Cardigan)
Newton, Tony (Braintree)


Crouch, David
Hunt, John
Nott, John


Davies, Rt. Hn. John (Knutsford)
Hurd, Douglas
Onslow, Cranley


d'Avigdor-Goldsmid, Maj.-Gen. James
Hutchison, Michael Clark
Oppenheim, Mrs. Sally


Dean, Paul (Somerset, N.)
Irvine, Bryant Godman (Rye)
Page, Rt. Hn. Graham (Crosby)


Deedes, Rt. Hn. W. F.
Jenkin, Rt.Hn.P. (R'dgeW'std&amp;W'fd)
Page, John (Harrow, W.)


Dixon, Piers
Johnson Smith, G. (E. Grinstead)
Pardoe, John


Dodsworth, Geoffrey
Johnston, Russell (Inverness)
Parkinson, Cecil (Hertfordshire, S.)


Drayson, Burnaby
Jones, Arthur (Daventry)
Pattie, Geoffrey


Durant, Tony
Jopling, Michael
Percival, Ian


Dykes, Hugh
Kaberry, Sir Donald
Price, David (Eastleigh)


Eden, Rt. Hn. Sir John
Kellett-Bowman, Mrs. Elaine
Rathbone, Tim


Edwards, Nicholas (Pembroke)
Kimball, Marcus
Rawlinson, Rt. Hn. Sir Peter


Elliott, Sir William
King, Evelyn (Dorset, S.)
Redmond, Robert


Emery, Peter
King, Tom (Bridgwater)
Rees, Peter (Dover &amp; Deal)


Eyre. Reginald
Kirk, Peter
Rees-Davies, W. R.


Fairgrieve, Russell
Kitson, Sir Timothy
Renton.Rt. Hn. SlrDavid(H't'gd'ns're)


Farr, John
Knight, Mrs. Jill
Renton, R. T. (Mid-Sussex)


Fenner. Mrs Peggy
Knox, David





Rhys Williams, Sir Brandon
Smith, Dudley (W'wick&amp;L'm'ngton)
van Siraubenzee, W. R.


Ridley, Hn. Nicholas
Spence, John
Vaughan, Dr. Gerard


Rifkind, Malcolm
Spicer, Jim (Dorset, W.)
Waddlngton, David


Rippon, Rt. Hn. Geoffrey
Spicer, Michael (Worcestershire, S.)
Wainwright, Richard (Colne Valley)


Roberts, Michael (Cardiff, N.-W.)
Sproat, lain
Wakeham, John


Roberts, Wyn (Conway)
Stainton, Keith
Walder, David (Clitheroe)


Rodgers, Sir John (Sevenoaks)
Stanbrook, Ivor
Walker, Rt. Hn. Peter (Worcester)


Ross, Stephen (Isle of Wight)
Stanley, John
Walker-Smith, Rt. Hn. Sir Derek


Rossi, Hugh (Hornsey)
Steel, David
Wells, John


Rost, Peter (Derbyshire, S.-E.)
Steen, Anthony (L'pool, Wavertree)
Wiggin, Jerry


Sainsbury, Tim
Stewart, Ian (Hitchin)
Winstanley, Dr. Michael


Scott-Hopkins, James
Stodart, Rt. Hn. A. (Edinburgh, W.)
Winterton, Nicholas


Shaw, Giles (Pudsey)
Stokes, John
Worsley, Sir Marcus


Shaw, Michael (Scarborough)
Tapsell, Peter
Younger, Hn. George


Shelton, William (L'mb'th.Streath'm)
Taylor, Edward M. (Gl'gow, C'cart)



Shersby, Michael
Tebbit, Norman
TELLERS FOR THE AYES:


Silvester, Fred
Thatcher, Rt. Hn. Margaret
Mr. John Stradling Thomas and


Sims, Roger
Thomas, Rt. Hn. P. (B'net.H'dn S.)
Mr. Spencer Le Marchant.


Skeet, T. H. H.
Trotter, Neville



Smith, Cyril (Rochdale)
Tyler, Paul





NOES


Allaun, Frank
Eadie, Alex
Judd, Frank


Archer, Peter (Warley, West)
Edelman, Maurice
Kaufman, Gerald


Armstrong, Ernest
Edge, Geoff
Kelley, Richard


Ashley, Jack
Ellis, John (Brlgg &amp; Scunthorpe)
Kllroy-Silk, Robert


Ashlon, Joe
Ellis, Tom (Wrexham)
Kinnock, Neil


Atkins, Ronald (Preston, N.)
English, Michael
Lambie, David


Atkinson, Norman
Evans, Fred (Caerphilly)
Lamborn, Harry


Bagier, Gordon, A. T.
Evans, loan (Aberdare)
Lamond, James


Barnett, Guy (Greenwich)
Evans, John (Newton)
Latham, Arthur(CityofW'mlnsterP'ton)


Barnett, Joel (Heywood &amp; Royton)
Ewing, Harry (Sfling.F'kirk&amp;G'm'th)
Lawson, George (Motherwell&amp;Wishaw)


Bates, Alf
Faulds, Andrew
Leadbitter, Ted


Bennett, Andrew F. (Stockport, N.)
Fernyhough, Rt. Hn. E.
Lee, John


Bidwell, Sydney
Fitch, Alan (Wigan)
Lestor, Miss Joan (Eton &amp; Slough)


Bishop, E. S.
 Flannery, Martin
Lever, Rt. Hn. Harold


Blenkinsop, Arthur
Fletcher, Ted (Darlington)
Lewis, Ron (Carlisle)


Booth, Albert
Foot, Rt. Hn. Michael
Lipton, Marcus


Boothrcyd, Miss Betty
Ford, Ben
Lomas, Kenneth


Boyden, James (Bishop Auckland)
Forrester, John
Loughlin, Charles


Bradley, Tom
Fraser, John (Lambeth, Norwood)
Loyden, Eddie


Broughton, Sir Alfred
Freeson, Reginald
McElhone, Frank


Brown, Hugh D. (Glasgow, Prauan)
Garrett, John (Norwich, S.)
MacFarquhar, Roderick


Buchan, Norman
Garrett, W. E. (Wallsend)
McGuire, Michael


Buchanan,Richard(G'gow,Springbrn)
George, Bruce
Mackenzie, Gregor


Callaghan, Jim (M'dd'ton &amp; Pr'wlch)
Gilbert, Dr. John
Maclennan. Robert


Campbell, Ian
Gourlay, Harry
McMillan, Tom (Glasgow, C.)


Cant, R. B.
Graham, Ted
McNamara, Kevin


Carmichael, Neil
Grant, George (Morpeth)
Madden, M. 0. F.


Carter, Ray
Grant, John (Islington, C.)
 Mahon, Simon


Catter-Jones, Lewis
Griffiths, Eddie (Sheffield, Brightside)
Mallalieu, J. P. W.


Castle, Rt. Hn. Barbara
Hamilton, James (Bothwell)
Marks, Kenneth


Ciemitson, Ivor
Hamilton, William (Fife, C.)
Marquand, David


Cocks, Michael
Hamling, William
Marshall, Dr. Edmund (Goole)


Cohen, Stanley
Hardy, Peter
Playhew, Christopher (G'wh.W'wch.E)


Coleman, Donald
Harper, Joseph
Meacher, Michael


Colquhoun, Mrs. M. N.
Harrison, Walter (Wakefield)
Mellish, Rt. Hn. Robert


Concannon, J. D.
Hart, Rt. Hn. Judith
Mendelson, John


Conlan, Bernard
Hattersley, Roy
Millan, Bruce


Cook, Robert F. (Edinburgh, C.)
Hatton, Frank
Miller, Dr. M. S. (E. Kilbride)


Craigen, J. M. (G'gow, Maryhill)
Healey, Rt. Hn. Denis
Milne, Edward


Crcnin. John
Hefler, Eric S.
Mitchell, R. C. (S'hampton, Itchen)


Crosland, Rt. Hn. Anthony
Hooley, Frank
Moonman, Eric


Cryer, G. R.
Horam, John
Morris, Alfred (Wythenshawe)


Cunningham,G.(lsl'rvgt'n,S&amp;F'sb'ry)
Huckfield, Leslie
Morris, Charles R. (Openshaw)


Cunningham,Dr.JohnA.(Whiteh'v'n)
Hughes, Rt. Hn. Cledwyn (Anglesey)
Morris, Rt. Hn. John (Aberavon)


Dalyell, Tarn
Hughes, Mark (Durham)
Moyle, Roland


Davidson, Arthur
Hughes, Robert (Aberdeen, North)
Mulley, Rt. Hn. Frederick


Davies, Denzil (Llanelli)
Hughes, Roy (Newport)
Murray, Ronald King


Davies, Hor (Gower)
Hunter, Adam
Newens, Stanley (Harlow)


Davis, Clinton (Hackney, C.)
Irvine, Rt. Hn. Sir A. (L'p'I.EdgeHill)
Oakes, Gordon


Deakins, Eric
Irving, Rt. Hn. Sydney (Dartford)
Ogden, Eric


Dean, Joseph (Leeds, W.)
Jackson, Colin
O'Halloran, Michael


de Freitas, Rt. Hn. Sir Geoffrey
Janner, Greville
O'Malley, Brian


Deiargy, Hugh
Jay, Rt. Hn. Douglas
Orbach, Maurice


Dell, Rt. Hn. Edmund
Jenkins, Hugh (W'worth, Putney)
Ovenden, John


Dempsey, James
John, Brynmor
Owen, Dr. David


Doig, Peter
Johnson,James(K'ston upon Hull.W)
Padley, Walter


Dormant), J. D.
Johnson, Walter (Derby, S.)
Palmer, Arthur


Duffy, A. E. P.
Jones, Barry (Flint, E.)
Park, George (Coventry, N.E.)


Dunn, James A.
Jones, Dan (Burnley)
Parry, Robert


Dunnett, Jack
Jones, Gwynoro (Carmarthen)
Pavltt, Laurlo


Dunwoody, Mrs. Gwyneth
Jones, Alec (Rhondda)
Peart, Rt. Hn. Fred







Pendry, Tom
Short, Rt. Hn. E. (N'ctle-u-Tyne)
Tuck, Raphael


Perry, Ernest G.
Silkin, Rt. Hn. John (L'sham.D'ford)
Urwln, T. W.


Phipps, Or. Colin
Silkln,Rt.Hn.S.C.(S'hwark,Dulwich)
Varley, Rt. Hn. Eric G.


Prescott, John
Sillars, James
Wainwright, Edwin (Dearne Valley)


Price, Christopher (Lewisham, W.)
Silverman, Julius
Walden, Brian (B'm'ham, Ladywood)


Price, William (Rugby)
Skinner, Dennis
Walker, Harold (Doncaster)


Radice, Giles
Smith, John (Lanarkshire, N.)
Walker, Terry (Kingswood)


Richardson, Miss Jo
Snape, Peter
Watklns, David


Roberts, Albert (Normanton)
Spriggs, Leslie
White, James


Roberts, Gwilym (Cannock)
Stewart, Rt. Hn. M. (H'sth, Fulh'm)
Wigley, Dafydd (Caernarvon)


Roderick, Caerwyn E.
Stoddart, David (Swindon)
Willey, Rt. Hn. Frederick


Rodgers, George (Chorley)
Stonehouse, Rt. Hn. John
Williams, Alan (Swansea, W.)


Rooker, J. W.
Stott, Roger
Williams,Rt.Hn. Shirley(H'f'd&amp;St'ge)


Roper, John
Strang, Gavin
Williams, W. T. (Warrington)


Rose, Paul B.
Strauss, Rt. Hn. G. R.
Wilson, William (Coventry, S.E.)


Ross, Rt. Hn. William (Kilmarnock)
Summerskill, Hn. Dr. Shirley
Wise, Mrs. Audrey


Rowlands, Edward
Swain, Thomas
Woodall, Alec


Sandelson, Neville
Thomas, D. E. (Merioneth)
Woof, Robert


Sedgemore, Bryan
Thomas, Jeffrey (Abertillery)
Wrigglesworth, Ian


Selby, Harry
Thorne, Stan (Preston, S.)
Young, David (Bolton, E.)


Shaw, Arnold (Redbridge,Ilford, S.)
Tlerney, Sydney
TELLERS FOR THE NOES:


Sheldon, Robert (Ashton-under-Lyne)
Tinn, James
Mr. John Golding and


Shore, Rt. Hn. Peter (S'pney&amp;P'plar)
Torney, Tom
Mr. Thomas Cox.

Question accordingly negatived.

Mr. Peter Rees: I beg to move, Amendment No. 43, in page 6, line 42, at end insert
'but subject in the case of a company being an authorised unit trust or an investment trust as provided by subsection (9) below.'

The First Deputy Chairman: With this amendment it will be convenient for the Committee to discuss Amendment No. 44, in page 8, line 18, at end insert—
'(9) In the case of a company being an authorised unit trust or an investment trust the additional payment which the company is liable to make under this section where it is liable to pay such an amount of advance corporation tax as is mentioned in subsection (1) above instead of being one-half of that amount shall be one-half of what that amount would have been if income of the company on which income tax had been borne by deduction were treated as franked investment income.
(10) In this section "authorised unit trust" has the meaning given in section 358 of the Taxes Act and "investment trust" has the meaning given in section 359 of that Act'.

Mr. Rees: As the Committee will appreciate, Amendment No. 44 is consequential on Amendment No. 43.
This is a very modest amendment designed to relieve certain unit trusts and investment trusts from the full impact of the clause. I am certain that, away from the heady atmosphere of Blackpool, right hon. and hon. Members on the Government side of the Committee must nourish a certain affection for unit and investment trusts as providing a means for the small investor to acquire a stake in our economy and, indeed, foreign economies.
Bearing in mind the lateness of the hour, I hope that the Committee will forgive me for descending for a moment into the technical background to the amendment. For those companies whose income is largely franked investment income, advance corporation tax holds no terrors because, shortly, they do not pay any. For those companies whose income is largely trading profits, advance corporation tax holds some terrors; and indeed, bearing in mind the anomalies disclosed in the previous debate, perhaps more as a result of the clause. But they at least are able to set their advance corporation tax against their mainstream corporation tax. But for those whose income is not franked—investment income and not trading profits—in other words, if it is derived from foreign companies, gilt-

edged securities or certain forms of interest, advance corporation tax bears doubly hard because they receive their income under deduction of tax and then when they distribute it they have to pay advance corporation tax. Thus in a sense this represents a double anticipation of the mainstream corporation tax.
This problem is compounded by Clause 10. The normal company can avoid this double charge of advance corporation tax by matching its distributions with its franked investment income or trading profits.
Some close companies may be in difficulty and no doubt the Chief Secretary may want to look at their case in due course. But unit trusts and investment trusts are in particular difficulties, unit trusts because under their constitution they have almost invariably to distribute the greater part of their income and investment trusts, if they are authorised investment trusts, because they are obliged to distribute 85 per cent, or more of their income. If their income is unfranked they will find that advance corporation tax will bear particularly hard on them and with any additional charge under Clause 10 they may be in considerable difficulties.
The Chief Secretary may not have realised that some unit trusts and investment trusts may not have sufficient current income to pay the distributions required of them by law and advance corporation tax and the advance corporation tax surcharge. In that situation they would probably have to have recourse to capital. I have searched the Budget speech in vain to see whether there was any evidence that this was the intention of the Chancellor when he uncovered Clause 10.
Another consequence of Clause 10 as it stands is that unit trusts and investment trusts may be discouraged from investing their funds in gilt-edged securities and foreign companies. Again, I should be surprised if this were the intention of the Chancellor when he introduced Clause 10.
Therefore, the amendment would allow a limited class of unit trusts and investment trusts, those defined in the Income and Corporation Taxes Act 1970, to treat the income they receive under deduction


of tax as though it were received from United Kingdom companies.
Right hon. and hon. Members on the Government side of Committee have endeavoured to convince us and the business community with bland words that they are particularly tender about their interests. I hope therefore that they look with favour on this modest amendment which endeavours to put right a possibly unintended hardship which results from Clause 10.

Mr. Joel Burnett: I feel inclined to tell my right hon. and hon. Friends and hon. Members opposite about franked investment income and unfranked investment income. I am sure they would find this fascinating, but, looking at the time, I feel that perhaps I should not do so. I suspect that the speech we have just heard from the hon. and learned Member for Dover and Deal (Mr. Rees) may have been his maiden speech from the Front Bench. If it were, I congratulate him. If it were not, it does not matter.
The taxation of unit trusts and investment companies is somewhat complicated, as the hon. and learned Gentleman knows only too well. I have some sympathy with the case he has presented, although he has not presented all the arguments, as he would be the first to admit. No doubt he omitted them because of the hour, but the main arguments he omitted were not those that favoured his amendment.
Let me make it quite clear, first, that the vast bulk of trusts' investment is in share capital, and the income therefrom is distributed to unit holders without involving liability to ACT or to the supplement. Many trusts manage their portfolios so that the receipts of unfranked income no more than balance the sum of their management expenses—running costs, salaries and so on—and any interest charges which they have to pay. In such cases, no part, or only a small amount, of such income is available for distribution. That gives hon. Members on both sides of the Committee some idea of how simple the taxation of this type of company is.
There are two other reasons why I cannot in any case readily accept the amendment. First, on the technical level, it would give too much relief. Secondly, if it were conceded as it stands I believe

we should receive representations from banks, finance houses, discount houses and so on for a similar concession, and I am not sure that we should want to give it.
However, in view of the hour, the admirable way in which the hon. and learned Gentleman presented his amendment, and the fact that I like him as well sometimes—though not sufficiently to accept the amendment—I am prepared to say that I shall consider the amendment and see whether I can go some way towards meeting the hon. and learned Gentleman's point.

Mr. Maurice Macmillan: I thank the Chief Secretary for what he has said. We shall have an opportunity to discuss the taxation of unit trusts and investment trust companies when we consider Clause 8 upstairs. In view of the complexity of the subject, the lateness of the hour, and the Chief Secretary's undertaking, I hope that my hon. and learned Friend the Member for Dover and Deal (Mr. Rees) will seek leave to withdraw the amendment.

Mr. Peter Rees: I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Sir John Hall: I beg to move Amendment No. 39, in page 6, line 45, after 'period', insert
'or in the case of a parent company, where the company makes a claim, the payment shall be deemed to be made on account of its subsidiary's liability to corporation tax for the relevant accounting period'.

The Chairman: With this we are to discuss Amendment No. 40, in page 7, line 2, leave out 'that liability' and insert
'the company's liability referred to in this subsection, or in the case where a claim is made, the company's liability together with the liability of its subsidiary or subsidiaries'.

Sir John Hall: The amendments are in a sense almost technical. They are designed to remedy a defect in the clause which I am sure was not intended.
In practice it is often the case in a group of companies for the parent company to pay the dividend arising out of the profits of the whole group and to incur the liability for the group's advance corporation tax, while the greater part of the mainstream tax is borne by the subsidiaries. The due date of payment of


mainstream corporation tax for the parent is often later than its subsidiaries, because of the delay in agreeing computations involving overseas income.
For example, groups such as Courtaulds, ICI or Unilever, with both United Kingdom and overseas subsidiaries, will generally, as the parent companies, declare the dividend and incur the liability for, and pay, ACT. But the subsidiary companies, especially overseas companies, may well settle their tax computations long before the tax computation of the parent company is settled, particularly where there are problems with double taxation relief, and so on. That means that the parent company has to wait until the final tax computation has been settled before it can claim an offset or repayment, if it is due, of the advance corporation tax. I am sure that that is not intended. It means an undue and unnecessary delay in settling such matters. I hope that I have only to bring the amendment to the attention of the Chief Secretary to ensure that it will be accepted.

10.45 p.m.

Mr. Joel Barnett: This is another interesting amendment. Indeed, it is fascinating. If there are a number of companies within a group that are liable to a supplement on ACT, and there are other companies in the group in the situation described, it could be unfair to operate this provision. On the other hand, group relief works in such a way as to ensure that it is taken as one, as it were, for tax purposes. But the amendment seems to go further than one might want to go. For example, it would put a single company inside a group in a better position than a single company outside a group.
I must repeat that I have some considerable sympathy with the amendment. I cannot accept it because there are a number of factors that demand consideration—for example, whether concessions could be made for this type of amendment and the effect that that would have on other amendments. There is also the fact that the amendment does not define what is meant by subsidiaries. I cannot accept the amendment but I can assure the hon. Gentleman that I am prepared to consider

the matter. I hope that he will be prepared to leave it at that.

Sir John Hall: I confess to a sense of some disappointment in that the Chief Secretary has not been able to accept the amendment. Nevertheless, I am grateful to him for saying that he is prepared to consider the matter and perhaps bring in his own amendments to give effect to the principle behind my amendment. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. William Clark: I beg to move Amendment No. 25, in page 7, line 30, at end insert:
'or on the date when the liability for such corporation tax is established, or on the date on which an amount of such corporation tax is either not in dispute or agreed under section 55 of the Taxes Management Act 1970, whichever is the earliest'.
This is a quite simple amendment. It relates to the question whether a company having paid advance corporation tax— accelerated corporation tax—should wait, if the mainstream corporation tax is not sufficient for the extra 50 per cent., until the corporation tax is due for repayment. That could hurt many companies. I am sure that the Chief Secretary will be kind in view of the brevity of my remarks.

Mr. Joel Barnett: As the hon. Gentleman knows, I have always respected his views. He is a member of my accountancy profession and association. He has presented his argument with great clarity. I only wish that every amendment were moved so briefly and succinctly.
If a company is liable to ACT and the supplement, because it has paid a dividend, but is not liable to corporation tax because of substantial capital allowances or all kinds of reasons, there is a clear case for saying that the ACT should be levied with or without the supplement.
On the other hand, the second part of the amendment, I am sorry to say, is far from clear. Often there are what are called estimated assessments on companies when accounts have not been agreed, either because they have not been submitted or because they have been submitted but various queries arise on them. Sometimes part of the assessment is cleared and paid on account, as


it were. It does not mean that the whole of the rest of the corporation tax in the assessment, or certainly a good part of it, will not then be payable. That makes the second part of the amendment defective. Therefore, I cannot accept the amendment as it stands.
There is also the possibility that we might be able to deal with this problem administratively by ensuring that inspectors of taxes and collectors who would be making the repayment would be able to do so with or without such an amendment. I assure the Committee that I appreciate what the hon. Gentleman has in mind. I have considerable sympathy with it and I will ensure that it is examined to see whether we can fit it in.

Mr. William Clark: I am grateful to the hon. Gentleman. In his usual generous way he has half accepted the amendment. When he says that he will give instructions to the Inland Revenue, I hope he will make it absolutely clear that where there is a difference between the inspector and the taxpayer over the assessment of profits, and the amount involved is trivial but the amount of the accelerated advance corporation tax is fairly substantial, the repayment should be made as early as possible.

Mr. Barnett: I certainly would not want to give the impression that I have it in mind to instruct inspectors of taxes, especially after my career when they have been instructing me for many years.

Mr. Clark: I was not suggesting for a moment that the Chief Secretary would ever dare to instruct the Revenue. He holds a position which enables him to advise the Revenue. Despite his background the Inland Revenue will perhaps pay attention to him. In view of his assurance, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

,Mr. Michael Shaw: I beg to move Amendment No. 32, in page 8, line 14, after 'commenced', insert 'on or'.
One lives in eternal hope of success, however small. On the face of it, subsection (8) deals with the affairs of a company which is being wound up. It tells what happens if the winding-up starts before 1st January 1974 or after

that date. It does not appear to say what happens if someone started the winding-up on 1st January 1974. I shall be grateful for the Chief Secretary's comments and even more grateful for his agreement.

Mr. Joel Barnett: I am obliged to the hon. Gentleman for the way he has moved the amendment. It is typical of accountants in this Committee. How well they speak to amendments!The hon. Gentleman has hit upon it exactly. The clause was drafted on the assumption that as New Year's Day had been declared a bank holiday under the Banking and Financial Dealings Act 1971 no company would begin winding-up on that day. We are now advised that this may not necessarily be the case and the amendment can be accepted without reservation.

Mr. Shaw: I must express my gratitude to the Chief Secretary and say how sorry I am that I shall not be a member of the Standing Committee to assist him further in points such as this.

Amendment agreed to.

Mr. Joel Barnett: I beg to move Amendment No. 26, in page 8, line 20, leave out 'recovered by an assessment' and insert 'assessed on the company'.

The Chairman: With this amendment we shall take Amendment No. 27, in page 8, line 23, at end add:
'and for the purpose of recovering the whole or part of the interest the amount of the payment may be so assessed whether or not it has been paid'.

Mr. Barnett: The amendments clarify and make more secure the assessment and enforcement mechanics relating to the supplement on advance corporation tax. The present wording of subsection (9), which it is now proposed to amend, does not make sufficiently clear that an assessment to the supplement should be possible, even though the amount due has been paid, in order to recover interest for the period between the due date and the date of actual payment. There is a risk therefore that a company could delay payment of the supplement and avoid an interest charge by paying the supplement just before the assessment is made.
The statutory background is that under Section 69 of the Taxes Management Act 1970 interest on unpaid tax is to be treated for collection and enforcement purposes as if it were tax charged and due and payable under the assessment to which it relates. It follows that where there is no assessment the interest cannot be treated as if it were tax charged under such assessment. The present wording of subsection (9) provides that the supplement
may be recovered by an assessment
and it seems at least arguable that there is therefore no power to assess solely for interest recovery purposes where the supplement itself has been paid. The proposed amendments will ensure that the subsection works as intended.

Mr. Maurice Macmillan: I should like to thank the Chief Secretary for his clear explanation and express the sadness which is perhaps appropriate to an ex-Treasury Minister that it is extraordinary how Government amendments are nearly always designed to make more secure the process of taking something from the taxpayer.

Amendment agreed to.

Amendment made: No. 27, in page 8, line 23, at end add:
' and for the purpose of recovering the whole or part of the interest the amount of the payment may be so assessed whether or not it has been paid '.— [Mr. Joel Burnett.]

Mr. Dell: I beg to move, That the Chairman do report Progress and ask leave to sit again.

Mr. Maurice Macmillan: It might help the Government if I were to indicate that, having reached this late stage and argued for so long about Clause 10, we would not wish to debate or obstruct the passage of the clause in Committee. We would wish to talk about it and perhaps move further amendments on Report.

Mr. Joel Barnett: I am not sure what the right hon. Gentleman is saying. If he is saying that he is prepared to let us have Clause 10, which I previously understood not to be the case, I should be happy to proceed to move, "That the Clause, as amended, stand part of the Bill".

The Chairman: I cannot take two motions at once.

Mr. William Clark: Have you not accepted the motion to report Progress, Mr. Thomas?

The Chairman: I have, but there is no difficulty for the Committee. If the Paymaster-General wishes to withdraw that motion, I am prepared to accept his doing so.

Mr. Dell: I was seeking to do what I understood the Opposition wanted. I understood that they wanted to have the main debate on Clause 10 on the next day's sitting on the Floor of the House. I moved the motion to report Progress in order to accommodate that desire. If the Opposition have changed their mind and want the debate on the Question, "That the clause, as amended, stand part of the Bill" to take place now, they should say so.

11.0 p.m.

Mr. Robert Carr: Perhaps the usual channels have not spoken as clearly as I thought they usually did. I thought we had agreed that we should complete the debate on Clause 10, and we should have been prepared to accede to that, but in view of the motion moved by the right hon. Gentleman we are prepared to stop now and have the debate on the clause when we resume at our next sitting.

Mr. Dell: I must make it clear that I moved the motion because I understood that was what the Opposition wanted. If the Opposition have decided that they do not want the main debate on the clause after the Whitsun Recess, it can take place now. If they want to have that debate after the recess, that will be satisfactory to the Government, but I should not like to think that as a result of the Government's accommodating the Opposition in this way further amendments will be put down to the clause and we shall not be able to debate the clause itself as the first business on the next day which is devoted to the Finance Bill in Committee of the whole House.

Mr. Carr: There has been a genuine misunderstanding. We are perfectly prepared to cease further consideration of the Bill now, and I give the right hon. Gentleman the assurance that my right hon. Friends and I have no intention of flooding the Amendment Paper with further amendments to Clause 10 prior


to the main debate on the clause. I cannot, of course, order right hon. and hon. Members to do anything any more than the right hon. Gentleman can do so, but I assure the Committee of the intentions of myself and those of my right hon. Friends who are conducting this debate.

Question put and agreed to.

Committee report Progress; to sit again tomorrow.

CHANNEL TUNNEL BILL

Ordered,
That the Select Committee on the Channel Tunnel Bill have leave to visit and inspect the sites of the works proposed in the Bill provided that no evidence shall be taken in the course of such visit.—[Mr. Dormand.]

ADJOURNMENT

Motion made, and Question proposed.

That this House do now adjourn.— -[Mr. Mellish.]

LOCAL GOVERNMENT FINANCE (NORTHAMPTONSHIRE)

11.4 p.m.

Mr. Arthur Jones: I very much welcome the opportunity which this Adjournment debate gives me to refer to a number of particular problems in Northamptonshire associated with this year's rates and also the four town expansion schemes in the county. I want to draw attention particularly to the level of the rate for the county and to try to assess the effects on the finances of all the local authorities involved arising from the four town expansion schemes in the county.
The question of local government finance has taken on particular significance this year due to the substantial rate increases generally throughout the country and particularly in rural areas. The level of this year's rate demand derives primarily from the inflationary processes at work in local government as elsewhere, but other factors have contributed and I want to look at both short- and long-term considerations.
In the short term, undoubtedly the reorganisation of local government, the establishment of regional water authorities and the new arrangements for the National Health Service are involving

significant initial expenditures. In personal terms we all know the added costs of moving house or moving an office from one site or unit to another. In addition, high interest rates are playing havoc with council budgets and treasurers are anxious in their judgments as to future trends. We hope that they may be making provision beyond what may be required in the out-turn.
I have been able to discuss the circumstances, both publicly and privately, with colleagues in Northamptonshire from both sides of the House. There are five of us representing constituencies in the county. With regard to rates I speak particularly for that part of the county which forms my constituency, comprising the two new districts of Daventry and South Northamptonshire. The term most commonly used to describe the rate increases this year is "staggering", the precept being 43p, an increase of about 80 per cent, on the 1973-74 figure.
Under the rate support grant, shifting resources from rural England into the great conurbation areas where so many of our problems lie meant in Northamptonshire a reduction in support for local government funds of 5p. My right hon. and learned Friend the Member for Hexham (Mr. Rippon), under his varying domestic relief arrangements, provided relief for the domestic ratepayers of 22p in the Daventry district and 21-5p in South Northamptonshire. The rearrangement of the domestic relief by the present Government, which allocated 13p for all rating authorities in England, resulted in a loss of support amounting to 9p and 8-5p respectively.
This late, unheralded and, I consider, irresponsible decision, clearly prejudiced in favour of the cities, for which significant aid had already been provided, resulted in a doubling of the original rate increase from 40 per cent, to the present 80 per cent. As for water, sewerage and sewage disposal services, the previous arrangements have led to an increased demand varying considerably between localities, but in general the poundage for Daventry is 16-3p, an average increase of 80 per cent., and for South Northampton 15-4p, an increase of 62 per cent.
It is understandable in these circumstances that individuals and communities have expressed their deep concern. A


widely based and strongly organised Northamptonshire rate protest has gathered momentum during the last two or three weeks. At the many protest meetings which have been held, although the rate level is the main target of criticism—clearly an increase of 80 per cent, is a severe blow to all and a real hardship to many—there has been in addition a questioning of rates as a means of raising local revenues. The rate is levied on buildings regardless of the degree of occupation, is regressive and has no regard to ability to pay. The revaluation last year resulted in significant changes in relative values, and some ratepayers are having to meet well over double the rate demand they paid two years ago.
Protest gatherings have been held in a large number of villages in the Daventry constituency, at one of which it was said that most revolts in history had been caused by unjust taxation. That reflects the general feeling in the county at the moment. One of the first meetings was organised by Mr. Frank Beers in Scald-well, a small village in the north of the county, and he has continued to play a prominent role in the protest. Ratepayers have been anxious to sign the many petitions which have been and are circulating throughout the towns and villages.
I am grateful to the Minister, the hon. Member for Widnes (Mr. Oakes), for having kindly received a deputation just after midday today. On behalf of all those who were there, I should like to thank him for his courtesy, for the time he gave and for the consideration that he was clearly prepared to give to the presentations made to him.
Meetings have also been organised by industrial and commercial ratepayers, and chambers of commerce have added their voices to the rising and angry criticism of the rating system and the level of expenditure met from local revenues. Urgent consideration is clearly required. Many of us on both sides feel that the Royal Commission under Lord Redclifre-Maud should have been required to extend its recommendations to include reform of local government finance. Regret that it did not do so has been expressed in the House on many occasions.
I turn now to a wider issue which concerns Northamptonshire as a whole. I have always been surprised that in the county there are no less than four town expansion schemes. I refer to Corby, which lies in the constituency of the right hon. Member for Kettering (Sir G. de Freitas), Wellingborough, Daventry and Northampton.
When replying to an Adjournment debate initiated by my hon. Friend the Member for Bromsgrove and Redditch (Mr. Miller), the Minister for Planning and Local Government told the House:
the main objective of a new town is to provide jobs, houses and other urban facilities for people who are prepared to move from overcrowded conurbations.
In an erudite and well-informed speech my hon. Friend said:
It is clear that there is a burden and that it results from central Government policy. Therefore, there is a natural feeling that the central Government should be doing rather more to meet it."—[OFFICIAL REPORT, 28th March 1974; Vol. 871, c. 773, 772.]
That is a statement with which I entirely agree, and it is germane to the circumstances in Northamptonshire and the case I hope to make for significant Government assistance.
The circumstances are exceptional. There are no less than four expanding towns in the county, and a view that is widely held, with which I agree, questions the wisdom of the county authority over the whole of the post-war period in supporting expansion to this extent without central Government aid on a contractual basis. Furthermore, outgoings must arise from the development at Milton Keynes, which is adjacent to Northamptonshire to the south-west, and Peterborough, on the county's north-east boundary.
The first of the four towns involved is Corby, which was designated under the New Towns Act in April 1950 and is planned to grow from a population of 16,743 in 1951 to 83,000. The only contribution to local expenditure made by the development corporation over the past 25 years amounts to about£½million in respect of road schemes. I am told that there have been no further direct contributions of any sort.
The second town is Wellingborough, which was the subject of an agreement in 1962 between the then London County


Council and the local authority. Wellingborough is to provide 11,500 dwellings for Londoners by 1981. The county council is not a party to the agreement but nevertheless has an obligation to provide statutory services for incoming population, with no obligations resting upon or contributions flowing from the development by the old urban district council.
Daventry—the town after which my constituency was named—was selected by the Government in 1961 for expansion under the Town Development Act 1952 to relieve overpopulation in the Birmingham area. The anticipated growth in the population is from 12,000 to 36,000 by 1981, and the agreement contains no provision for support for local rates either from Birmingham or from the central Government. Birmingham Corporation acquires land and builds houses, factories and shops, together with estate roads, and for a 30-year term it manages property acquired and remits half the net profits—if there are any—to the county council, which has a responsibility to contribute a proportion thereof to Daventry. At the end of 30 years—or earlier if the original outlay is recouped —Birmingham has to transfer all land in its ownership to Daventry.
I come now to the old county town of Northampton, and I very much welcome the presence of my hon. Friend the Member for Northampton, South (Mr. Morris). Northampton was designated in 1968 and is planned to provide homes for 70,000 Londoners by 1981. The development corporation in this case has made significant contributions—to roads£3-1 million, to drainage schemes£300,000 and, in the last financial year,£396,000 to the old county borough to assist in education, health, welfare and child care. A partnership agreement entered into between the old county borough and the development corporation on an informal basis provides that the corporation shall make financial contributions of such a size as to restrict rate increases to a reasonable level. It is believed that the Treasury did not accept any commitment which involved the propping up of the county borough rate.
The combined effects of these plans for the reception of communities into the county has been to make Northamptonshire the fastest-growing area in the

United Kingdom, the population having increased by 12 per cent, over the past five years. The next on the list are Bedfordshire, with an increase of 10-4 per cent., Berkshire with 9-3 per cent, and West Sussex with 9-2 per cent.—all in the South-East.
The predicted figures for the 20 years 1961 to 1981 make Northamptonshire the third highest growth area in the whole of Europe. This position was established in papers submitted to the European conference of Ministers responsible for regional planning, held in Bonn in September 1970. The highest growth rates for the period from 1961 to 1981 were given as Turin, 72 per cent.; Rome, 70 per cent.; Northamptonshire, 58 per cent.; and Milan, 55 per cent. This adds significant substance to my case.
From a 1971 census figure of 486,625, the population growth in the country will accelerate in the period up to 1991 to an estimated 794,400, a 70 per cent, increase. The existing stock of 160,000 dwellings will increase up to 1981 by 50,000 and by a similar figure in the next decade.
During the 1950s and 1960s, it was generally felt that the arrangements for Government grants were adequate to ensure that no undue burden fell on the ratepayers of the county. This was a serious misassessment, and I draw attention to the fact that no central Government direct contribution to the support of the rates has been made or is available. The merging of fast-growing Northampton into the new county creates a situation in which the widening of the basis of charge for education, social services and highways means that it is spread over the county as a whole and effectively negates the unwritten guarantee given by the development corporation in relation to rates.
This unparalleled growth rate is imposing heavy burdens on the ratepayers of Northamptonshire and in the opinion of the county council cannot be sustained at the present rate, still less accelerated, without special and additional financial assistance from funds other than local rates. I draw attention to early-day motion No. 122, standing in my name and the names of right hon. and hon. Members representing other Northamptonshire constituencies.
The main increases in county council expenditure are for education, roads and social services. The school population is increasing at the rate of 5 per cent, per annum, over three times the national annual rate of increase. Highways expenditure is almost totally committed to the new and expanding towns. The capital programme for 1974-75 includes schemes for construction or advance land acquisition totalling£38 million.
The present basis of the distribution of the rate support grant does not have sufficient regard to rapid growth. The population figure fixed at mid-1972 is two years out of date. The resentment on the part of domestic as well as industrial and commercial ratepayers is understandable and there is growing resistance to the expansion schemes.
We are at a threshold of decision. Within the next two years conclusions must be reached by the county council as local planning authority on whether to sanction the next phases of land release in each of the four expanding towns. The county council must consider what the real costs involved will be and whether these can be met without serious detriment to existing services or excessive rate demands.
A statement of the county's case, prepared by Mr. Jeffrey Greenwell, the chief executive of the county council, was handed in at No. 10 Downing Street this morning on an all-party basis, and I hope that we shall have an assurance from the Under-Secretary of State on behalf of the Government that the whole case will be given immediate and careful consideration.
On the question of rates the hon. Gentleman will, I think, agree with me that local government finance requires to be dealt with as a matter or urgency. I hope that this is recognised and will be admitted and that we shall not be asked to accept assurances of consultation. I submit that the facts are well known. The whole subject has been under review for a number of years. We have had a Green Paper. Clearly it is not consultation but decision-taking which is now required.
I appreciate that a review of the whole rating system is an involved matter which requires considerable and careful investigation, and I wonder whether the hon. Gentlemen will consider whether it could

not be done on an all-party basis. We cannot afford to have party differences and divisive decisions on something which is the bedrock of our democratic system. We do not want all power to be congregated here at Westminster. We need to have it diffused over the country as a whole. I think that there is a great deal to be said for an all-party approach on a matter of this kind.
With regard to financial support for local authorities where there is a need for expenditure to meet the requirements of new and expanded towns, the case is both obvious and proven. The cost of the new towns in relation to the county rate can be isolated and can be presented on a basis of poundage per 10,000 of the population increase. In Northamptonshire we look for help which will be effective in the second half of the present financial year. Powers to reduce the rate lie in section 16 (6) of the Counter-Inflation Act of last year.
Finally, I quote from the letter addressed to the Prime Minister by the five Members of Parliament in the county:
There should in 1974-75 be a special grant for Northamptonshire in advance of the revised arrangements for next year, in recognition of the country's unique and exceptional financial circumstances.
These are matters to which I ask the Government to give urgent consideration——

Mr. Tom Boardman: I must apologise to my hon. Friend for not being here to listen to the earlier part of his speech. It may be that he has dealt with this matter already. I have to declare an interest in that I am a ratepayer in Northamptonshire. It is the general view that the gerrymandering tactics of this Government have added substantially to the burden of ratepayers. Can my hon. Friend give the House any idea of the amount involved?

Mr. Jones: I dealt with that matter earlier in my remarks. I hope that I covered it adequately.

Mr. Deputy Speaker (Mr. George Thomas):: Mr. Gordon Oakes.

Mrs. Maureen Colquhoun: Mrs. Maureen Colquhoun (Northampton, North) rose——

The Under-Secretary of State for the Environment (Mr. Gordon Oakes): My


hon. Friend the Member for Northampton, North (Mrs. Colquhoun) has promised to detain the House for only two minutes.

Mr. Deputy Speaker: If the hon. Lady has made an arrangement with the Minister, well and good. Mrs. Colquhoun.

11.21 p.m.

Mrs. Colquhoun: It must be said at once that there is a case for special rating relief for Northampton and Northamptonshire and that it is an overwhelming one.
The hon. Member for Daventry (Mr. Jones) has set out the facts of the situation. Northamptonshire is the only county afflicted by such far-reaching expansion, involving, as it does, four new and expanding towns. This is a formidable commitment for the county and one that no Government can expect local ratepayers to bear.
I speak from the point of view of Northampton itself. As a result of the special clause which the elected representatives of the old Northampton borough council had written into the agreement with the development corporation, Northampton itself is, and was before the Opposition began their organised rating lobby, in negotiation with the Northampton Development Corporation to work out the special help due to it as a result of expansion. We are grateful to my hon. Friend the Under-Secretary for allowing those negotiations to be set up. It is a state of affairs which Northampton Borough Council was unable to bring about and, indeed, it was refused by the previous administration——

Mr. Michael Morris: Will the hon. Lady give way?

Mrs. Colquhoun: No, I shall not give way.
As we have heard, the county has not been so fortunate. The previous Conservative administration there did not make the same good deal as the borough did, and rumour has it that it was asleep.
I draw my hon. Friend's attention to the water board and reorganisation——

Mr. Deputy Speaker: Order. If the hon. Lady wants to give the Minister

time to reply, she had better draw her remarks to a conclusion.

Mrs. Colquhoun: I ask my hon. Friend to look into the situation in which Northampton Borough Council finds itself as a result of the creation of the reorganised water board. It has no elected representative on the Anglian Water Authority. It is unable to obtain information about the almost£2 million in rates that it has to pay. It does not know how it is to be spent or on what. Will my hon. Friend publish a list of the members of the board and ask it to inform the elected representatives on Northampton Borough Council where the money is going?

11.25 p.m.

The Under-Secretary of State for the Environment (Mr. Gordon Oakes): My
time is unfortunately limited. I understood that my hon. Friend the Member for Northampton, North (Mrs. Colquhoun) would take only one minute. However, I must now condense what I was proposing to say.
I am delighted that the right hon. Member for Finchley (Mrs. Thatcher) and her hon. Friend the Member for Hornsey (Mr. Rossi) are present for the debate on this important subject. We also had a debate on rates last week.
The hon. Member for Daventry (Mr. Jones) is right to raise this subject, which is of vital concern not only in Northamptonshire but in his constituency. I pay tribute to the delegation that he brought to see me today. They offered constructive suggestions on rating and concisely and precisely put the problems of Northamptonshire as the hon. Member so often has done in the Chamber and in Committee.
It would be easy to talk about gerrymandering, as the hon. Member for Leicester, South (Mr. Boardman), attempted to do, and to turn the debate into a political hoo-ha between one side of the House and the other. First, I do not think it is desirable to do that, because that is not what the public at large would want, and secondly I would not do that since the hon. Member for Daventry has raised this debate.
Had some of the suggestions made by the hon. Gentleman, which we backed,


been adopted by the previous Government, we might not have been in the difficulty in which we find ourselves today. I pay tribute to the hon. Gentleman for the constructive rôle he has played in so many local government matters.
The hon. Gentleman suggested that we should look at the whole question of rating on a non-party basis. I am inclined to agree with him. I think that constructive suggestions could come from both sides of the House, from local government associations and from individual councils. I believe that the time is rapidly approaching, bearing in mind the burdens on the rating system, which were clearly pointed out by the deputation which came to see me today, when there must be such an approach to what is agreed to be an archaic system of levying a tax in the 1970s.
The hon. Gentleman knows—I shall not labour the point—that there was a reasonably constructive Green Paper on this subject, that a White Paper was issued by the previous Government which diminished the suggestions in the Green Paper, and that there was a Bill which virtually adopted none of the suggestions in either the Green Paper or the White Paper. That is to be regretted. Let us start again in future, possibly on an all-party basis, to deal with the whole question of our archaic taxation system.
In the few minutes available to me I should like to deal with some of the points made by the hon. Gentleman regarding Northamptonshire. I accept that it is the fastest-growing county in the country—indeed, as he pointed out, in Europe. It has four new or expanding towns. In considering the effects of the previous Government's rate support grant system, particularly the needs element, I found that counties in which there are new or expanding towns—I concede that Northamptonshire is probably the worst example—have been hit the most. I refer to Cheshire, Lancashire and other areas where there are new or expanding towns.
I am urgently looking at the rate support grant formula to see whether anything special can be done next year to deal with new and expanding towns and areas where there is a growth in popula-

tion. This matter will have to be dealt with on a different basis from the last rate support grant, which was based on 1971-72 figures, because where there is an explosive expanding rate, as in Northamptonshire, those figures are too out of date.
My right hon. Friend the Prime Minister once said that in politics a week was a long time. Three years is an age for rating purposes. Therefore, we must pay special attention to this element. The hon. Member referred, in his delegation and in the House, to the peculiar and difficult problems of a county which has to provide the infrastructure for new towns and for developments for other areas. Such counties are performing a service for London and the nation as a whole. They are providing facilities for other people but the ratepayers of the counties concerned must pay.
Can we do something about it in this year's rates? As I promised the hon. Member this morning, I shall put the matter to my right hon. Friend the Secretary of State. I must be frank with the House: this is a matter in which we have to deal with the Treasury. We are in a difficult situation at present. I think we decided correctly that we could not increase the total amount of the rate support grant bequeathed to us by our predecessors. Whether it would be possible to do this I very much doubt, but I shall consider the hon. Member's suggestion.
Because of the peculiar nature of the system, which means that Northamptonshire and other counties are helping their neighbours by taking in populations at considerable expense and difficulty to the ratepayers of their areas, we shall certainly consider the matter, but I cannot give any undertaking on the question whether any money can be forthcoming this year.
What I can and do promise—and what I have promised—is that of the many factors concerning the rate support grant a crucial one which must be taken into account is the question of the expansion of the new towns.
To my hon. Friend I say that we were opposed to the whole undemocratic arrangement of water authorities as set up by the previous Government. We are


certainly giving active consideration to the way in which to deal with the question of sewerage charges—when people who are not connected with a main sewer find themselves having to pay a sewerage rate. They have had to pay it as part of the ordinary rates in the past, but if it is a sewerage charge it is a charge for services. I shall certainly consider this question actively, because my constituents and many other people in rural areas find themselves facing this problem.
I thank the hon. Member and my hon. Friend for the contributions they have

made to this debate. I regret that my reply has had to be a very short one, but I can assure the hon. Member and my hon. Friend, and the other hon. Members representing Northamptonshire constituencies, that the points put to me in the petition and the deputation this morning and the points raised by the hon. Member tonight will be taken into consideration by me and by my right hon. Friend.

Question put and agreed to.

Adjourned accordingly at twenty-seven minutes to Twelve o'clock.